With shares of Eli Lilly ( LLY 1.39% ) After a temporary increase of over 10% on August 8th due to its second quarter earnings report, it may seem likely that the company’s recent strong performance will persist indefinitely.
However, is there concrete evidence to back up that claim, or is it just an illusion concealing a risky investment that could result in losses for those who invest at this moment? Both viewpoints have valid arguments supporting them.
Worries about limited supply are decreasing at the same time that demand could potentially rise once more.
One justification for considering the purchase of this stock is that Eli Lilly has exceeded its initial revenue projections for the year. Management has increased the revenue forecast to a maximum of $46.6 billion, representing a significant 38% growth compared to the previous year. Additionally, they have also raised the minimum revenue expectations. earnings per share (EPS) is a financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock. There was an increase of 15% in guidance, bringing it up to $15.10.
The rise in revenue was fueled by the popularity of Lilly’s diabetes drug, Mounjaro, and weight-loss drug, Zepbound. Due to high demand for these medications, the company has invested an additional $5.3 billion in the second quarter to expand production capacity specifically for these two drugs. Management believes this expansion will help meet the current demand for the products.
It is crucial because the company intends to seek approval from regulators to sell the medications for more medical conditions, such as treating heart failure in obese patients. If this approval is granted, which seems likely given the current clinical evidence, the potential market size will expand further. This is another reason why investing now is still a viable option.
In the initial six months of 2024, Lilly experienced a significant 31% increase in its revenue compared to the previous year, surpassing $20 billion. Even if the growth rate remains stable and does not increase further, there is still room for it to slow down considerably before any worries arise about the company’s stock losing momentum.
Punctuality is not the sole issue to be worried about.
Although Lilly has shown impressive results lately, there have been a few issues that cast doubt on the argument that it is too late to purchase the stock.
The main one is its valuation Currently, The price-to-earnings ratio (P/E) An alternative way to interpret this information is that the company’s multiple is approximately 114. This means that if the company were to use all its current earnings to repay shareholders for the cost of purchasing all outstanding shares today, it would take 114 years, without considering any potential growth in earnings over time.
This concept should not be taken at face value. The idea is that the current valuation of the stock suggests an expectation that Eli Lilly will sustain rapid growth in net income for an extended period. Consequently, there is an elevated risk that at some point in the future, the growth rate may slow down, causing a significant drop in Lilly’s stock price.
From this perspective, investors purchasing the stock at its present value are considered to be arriving late to the game. They are paying the highest price to assume a risk that previous investors did not face due to having bought the stock at a lower price. In this aspect, critics of the stock are accurate in their assessment.
There is no restriction on Lilly’s earnings continuing to increase at a pace surpassing current predictions. Additionally, there is no limitation on its valuation reaching even greater heights than its current level. Considering these factors along with the numerous opportunities available, the most advisable step would be to invest in Lilly’s shares, provided you are comfortable with its existing valuation. In this regard, it is not close to being too late to consider this investment.
