Is Eli Lilly Stock Undervalued?

Eli Lilly (NYSE:LLY) is one of the major pharmaceutical companies that has come to dominate the market for GLP-1 anti-obesity drugs.

As the maker of Mounjaro and Zepbound, Eli Lilly is in an excellent position to take advantage of growing demand for weight-loss drugs but the LLY share price is currently down nearly 22% over the past 3 months.

So, is Eli Lilly undervalued and a buy on the dip, or is the market valuing the stock fairly?

Why Is Eli Lilly Trending Lower?

Like many stocks that have gone on powerful runs recently, Eli Lilly has proven vulnerable to selloffs when results don’t meet inflated investor expectations.

The company’s Q3 earnings report was nothing to scoff at, with revenues rising 20% to $11.44 billion and net income soaring to $970 million from a loss of over $57 million a year ago.

Where disappointment came is that the company missed Wall Street estimates that were even higher than its actual performance.

Analysts had expected the company to post revenues of $12.1 billion and earnings per share of $1.47. In reality, EPS came in at $1.18. As a result of this miss on both the top and bottom lines, LLY shares began to sell off after the earnings release and have remained depressed ever since.

Valuation Metrics for LLY Remain High

A quick examination of Eli Lilly’s price multiples may make it seem strange to discuss undervaluation with respect to LLY, even after the stock has lost so much of its value.

After all, the stock is trading at about 57x forward earnings, 50x book value, 98x cash flow and 17 times sales.

Even the price-to-earnings-growth ratio of 2.8 suggests that LLY is trading at a high premium to its immediate growth potential. But long-term growth could still make it an appetizing buy.

Although Eli Lilly does look pricey right now, it still has huge long-term growth potential. Zepbound and Mounjaro stand alongside Novo Nordisk’s Ozempic and Wegovy at the forefront of the GLP-1 market.

Furthermore, studies have shown that Eli Lilly’s drugs are actually a bit more effective than Novo Nordisk’s when it comes to shedding weight.

The market for these drugs is potentially enormous. Worldwide, over 1 billion people suffer from obesity, and over half a billion suffer from diabetes.

Even worse is the fact that the prevalence of diabetes is expected to rise at an alarming rate over the next several years. By 2045, over 780 million people around the world are expected to be dealing with diabetes.

As a result, companies like Eli Lilly and Novo Nordisk are forecast to have very long growth runways in the coming years as makers of effective pharmaceutical treatments for these endemic conditions. By 2033, the market for GLP-1 drugs could reach nearly $170 billion.

Short-term Volatility, Long-term Value

For the moment, there’s a good chance that LLY will continue to experience price volatility. Not only is the market trying to price in the value of somewhat distant growth, but the company is also making large investments in its manufacturing capabilities.

To take full advantage of its opportunities down the road, management has little choice but to outlay capital now. However, for the moment, the company is subject to cyclical inventory changes that affect its ability to reliably make and sell its new drugs at consistent levels.

Eli Lilly may also see some news-related volatility as incoming Health and Human Services Secretary Robert F. Kennedy Jr. pursues his unorthodox regulatory plans at the department.

Kennedy has been generally critical of GLP-1 drugs, preferring nutrition-based solutions to obesity. While Kennedy likely has limited options in reducing the use of these drugs, his presence at the head of the department that oversees the FDA could make for a somewhat uncertain regulatory environment.

The good news for Eli Lilly is that this short-term uncertainty is likely overshadowed by the opportunity the company has in weight-loss and anti-obesity drugs.

Over the next 3-5 years, analysts expect to see the company’s EPS rise by almost 40% on an annualized basis. With the GLP-1 drug market expected to increase steadily well into the next decade, Eli Lilly has the potential room for earnings growth to make its seemingly high valuation make sense.

Eli Lilly is also developing new drugs that are likely to spur growth in coming years. Right now, the company has new drugs under regulatory review for sleep apnea and Crohn’s disease. Drugs still in various phases of clinical trials target everything from cancers to neurodegenerative disorders.

While anti-obesity drugs are certainly the main headline for Eli Lilly right now and are likely to drive much of its growth for many years to come, other opportunities for the company to build value of its drug portfolio sit on the horizon.

Is LLY Undervalued?

The potential growth in both earnings and revenue that could result from rising demand for GLP-1 drugs over the next decade likely justifies premiums for LLY that would normally be hard to defend in the pharmaceutical world. Even after Q3’s less-than-inspiring results, analysts still see large potential upsides in Eli Lilly.

The median target price for the stock from 31 standing forecasts is $1,010, suggesting that LLY could still have a roughly 35% upside compared to its current price of $742.50.

Under practically any other circumstances, it would likely be reasonable to conclude that Eli Lilly was trading far above a reasonable valuation. The GLP-1 drug market, however, is somewhat unique in the sense that it represents a novel, in-demand treatment for chronic illnesses that affect substantial parts of the global population.

Between this fact and the moat that Eli Lilly enjoys as one of the two largest GLP-1 makers, it seems likely that shares in the company could be trading below their fair value due to the post-Q3 selloff.

That said, LLY’s price is unlikely to follow a straight line up from here. As the company continues to build its manufacturing capabilities, investors will likely see volatility in their LLY shares. As a long-term growth buy, though, Eli Lilly seems to have a lot to offer.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.