It can be hard to make the case that a stock which is trading at more than 120 times earnings is still a good buy, and that its growth prospects still look strong enough to justify its current valuation. But that's what I'm going to try to do with Eli Lilly (LLY -0.37%) stock right now. There's no doubt that it's expensive and that investors are paying a premium for it. But here's why you may want to buy it anyway.
Another growth catalyst is coming for the business
Eli Lilly has been generating some strong growth this year as it benefits from the success of two new drugs: Zepbound (approved for weight loss) and Mounjaro (approved for diabetes). During the first three months of the year, the company's revenue rose by 26% year over year to $8.8 billion, largely as a result of those products.
But there could soon be another product which generates significant revenue for its operations: donanemab. Donanemab is the company's early Alzheimer's treatment which is still waiting for approval from regulators, but there's a positive sign that it could be coming soon.
An advisory panel for the Food and Drug Administration (FDA) recently endorsed donanemab, unanimously believing that the benefits of the treatment outweigh the risks. In a clinical trial, the drug showed that it could slow the rate of cognitive decline in people with Alzheimer's by as much as seven months. The results were similar to those achieved from Biogen's Leqembi, which obtained approval last year.
At its peak, donanemab could easily be a blockbuster drug as analysts project it could generate around $5 billion in revenue.
There's a lot of upside still left for the stock
Based on the consensus-analyst price target of $787, Eli Lilly's stock may look like it has a long way to fall given its high value. But analysts routinely update their price targets as they typically only look at where the stock may go in just the next 12 months or so. And they have been upping their views on Eli Lilly stock -- three of the past five analysts have set price targets of at least $900 or more.
While that doesn't appear to suggest a lot of bullishness, that's just on where the healthcare stock may go in the short term. If you're a long-term investor who's looking to buy and hold shares of Eli Lilly, there could be far greater gains for you to earn down the road. Between donanemab, Mounjaro, and Zepbound, the company has some incredibly promising products in its portfolio which can generate strong growth for the business for years to come.
And with Eli Lilly's profit margins often coming in at 20% or higher, a lot of that top-line growth will translate into better earnings numbers as well.
Eli Lilly is still a no-brainer buy at this point
At more than $840 billion, Eli Lilly's market capitalization isn't far from the $1 trillion mark, and it looks to be in good shape to eventually become the first healthcare stock to reach that milestone.
The company has excellent fundamentals and some highly successful products in its portfolio. In the short term, the stock can experience volatility due to the markets. But with a lot more growth to come in the weight-loss, diabetes, and Alzheimer's markets, there's no reason to expect that the stock has reached a peak or that it will anytime soon. Eli Lilly is the type of investment you can buy and forget for a long time.
