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Companies worth more than $1 trillion are a rare breed, at least for now. Many more will join this elusive group in the years and decades to come. The next one to achieve this feat may be General Electric. Eli Lilly (NYSE: LLY).
The pharmaceutical giant is one of the companies closest to the trillion-dollar market cap milestone. Here’s why the drugmaker has the ability to outpace its competitors and keep growing long afterward.
Will evaluation be a problem?
Eli Lilly’s market cap is $885 billion at the time of writing. It may not seem like a big deal at these levels; the stock could easily break the $1 trillion mark within a year. But there are other companies close by, too. At least one of them, Berkshire Hathawaycloser, with a market cap of $930 billion.
However, the single greatest reason Lilly was able to reach the trillion-dollar club before Berkshire Hathaway and all its peers of similar size is the incredible pace of growth that has been a hallmark of recent years. The company has grown faster than the next group of potential trillion-dollar companies, a group that also includes Taiwan Semiconductor, Broadcomand Tesla(Tesla briefly hit a trillion-dollar valuation in late 2021, but has not performed well since then.)
But what’s the main obstacle to the company’s trillion-dollar valuation? That’s exactly it: valuation. The company’s forward price-to-earnings ratio is 59.01 — high by almost any measure. The healthcare industry average is 19.1. In other words, any perceived problem with the business could lead to a major stock price correction.
Meanwhile, Berkshire Hathaway’s forward P/E ratio of 19.8 is more reasonable. But it’s important to note that many of the stocks in this group don’t look particularly cheap.
Again, it’s important to note that Lilly’s past performance doesn’t guarantee that it will continue to grow faster than all other companies within arm’s length of the trillion-dollar mark. However, the company’s financial results are still impressive.
In the second quarter, revenue rose 36% year over year to $11.3 billion. Adjusted earnings per share rose 86% year over year to $3.92. Lilly raised its full-year outlook, the second time it has done so this year.
Even management, who has more knowledge of the subject than anyone else, underestimates the company's revenue and profit potential. Shares rose more than 8%. After it released its second quarter earnings report.
There’s more to the story. Last year, Lilly sold the rights to Basqimi, a drug that treats hypoglycemia. Excluding the $579 million in revenue that the Basqimi sale contributed in the second quarter of 2023, net income would have grown 46%. The drugmaker also recently won approval for Kisunla, a treatment for early-onset Alzheimer’s disease.
This should be another important growth driver for the drugmaker, given the dire need in this area. Here’s the bottom line: Lilly’s stock has performed as well as it has in recent years because of the company’s impressive clinical and regulatory progress. It’s now reaping the benefits of that with impressive financial results, and it should continue to do so for the foreseeable future.
Currently, Street analysts expect earnings per share to grow at a rate of 76% per year over the next five years. With expectations like that, the company’s valuation becomes more reasonable.
Eli Lilly He could But at the same time, Berkshire Hathaway did much better, or at least as much—or at least not much worse, than the other stocks in the strike range—to achieve a market value of $1 trillion first.
Beyond the trillion dollar mark
But what happens if Lilly becomes a trillion-dollar company? The drugmaker is expected to continue growing for a long time after that. It still has several important drugs in its pipeline that look incredibly promising.
Developing innovative treatments is one of the most important aspects of successful treatment. Pharmaceutical business — is the perfect fit for the company. Its current pipeline includes products such as orforglibon and retatrotide, two potential anti-obesity drugs. Weight-loss treatments have recently played a major role for Eli Lilly.
Despite increasing competition in the field, this drug is expected to remain one of the leaders. According to research firm Evaluate Pharma, orforglibon and retatrotide could generate revenues of $8.3 billion and $5 billion, respectively, by 2030. Both are in Phase III studies.
Lilly’s early-stage programs include a potential gene therapy for hearing loss that has already cured one patient in a Phase 1/2 trial. The company has many other exciting programs besides these.
So while reaching a trillion-dollar market cap is a huge achievement for Eli Lilly, investors shouldn’t get too hung up on it. The company is incredibly innovative and will likely continue to outperform the market long after it reaches that milestone. To me, the stock is worth buying.
Should you invest $1,000 in Eli Lilly now?
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Prosper Junior Pacini The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has Disclosure Policy.
Prediction: This fast-growing company could become the next trillion-dollar stock Originally posted by The Motley Fool
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