Once high-flying on the strength of Ozempic and Wegovy, pharmaceutical major Novo Nordisk (NYSE:NVO) has seen its shares slide more than 50 percent over the last 12 months as a combination of competitive pressure and inflated investor expectations has pummeled the stock. Despite these challenges, however, Novo Nordisk remains a strongly profitable business that could have long-term strengths. Where does this leave NVO stock today, and where will Novo Nordisk go next?
Why Did NVO Selloff?
Several factors have contributed to Novo Nordisk’s selloff, most notably a string of revenue guidance cuts and earnings misses. In Q3, for instance, US revenue growth had slowed to 12 percent, coupled with an increase in operating profit of just 5 percent. Sales growth for the year is now expected to only come in at 8-11 percent.
Underlying Novo Nordisk’s struggles has been mounting competition in the market for GLP-1 drugs. Although Novo Nordisk was the first mover in this market, it was soon followed by Eli Lilly. As of Q3, Eli Lilly’s weight loss drugs had surpassed Novo Nordisk’s in sales, putting the business at the top of the GLP-1 market. In addition to this direct competition from another pharma major, Novo Nordisk’s early lead in the race was also eaten into by compounded GLP-1 drugs.
It’s also worth noting the role that investor enthusiasm early in the GLP-1 surge played by pushing NVO to extremely high prices. In mid-2024, shares of Novo Nordisk were trading at almost 50x earnings. While these prices may have been justified if Novo Nordisk had been able to maintain a solid grip on the GLP-1 market, the increasing competitive pressures placed on it by Eli Lilly and others proved too much for NVO to maintain this kind of valuation.
Has Novo Nordisk Become Undervalued?
Considering the large losses of the past year, there’s an argument to be made that NVO has sold off to the point where the stock is now undervalued. Shares are currently trading at just 14.3 times trailing 12-month earnings. Just as investor enthusiasm seems to have pushed the stock too high last year, bearish sentiment may have caused an overcorrection.
Another indicator that NVO may be undervalued is its dividend yield, which currently stands at 3.5 percent. Not only is that far above the average yield among the S&P 500 stocks, but it is also about the highest Novo Nordisk’s yield has been in the more than 15 years since it began paying a dividend.
Even so, analyst price targets don’t suggest that there’s massive short-term upside in NVO. The consensus price target for the stock is $56.44, implying an upside of a little more than 15 percent from the most recent price of $49. Although respectable, this upside may not be quite enough to entice investors after the beating that NVO shares have taken in the last 12 months. Indeed, institutional investors have been exiting the stock at a rapid pace even as prices have dropped, with about $47.5 billion worth of NVO shares sold by institutions in the last six months compared to buying activity of only $28.1 billion.
What Does the Path Forward Look Like?
Right now, Novo Nordisk is making serious efforts to regain some of its hold on the weight loss drug market. Recently, for instance, the business announced promotional pricing of $199 per month on Ozempic and Wegovy for the first two months of use, after which customers would pay $349 monthly. This kind of promotional pricing may help Novo Nordisk regain some market share by competing on price with Eli Lilly.
Another factor that could heavily impact NVO’s share price is the result of ongoing studies Novo Nordisk is conducting into the potential for GLP-1 drugs to treat Alzheimer’s disease. Although it would likely be unwise to bank on the success of the trials, an Alzheimer’s indication for semaglutide could help propel future growth and increase the value of Novo Nordisk’s existing drug portfolio.
In the next few years, however, analysts aren’t expecting massive earnings gains from Novo Nordisk. The 3-5 year annualized EPS growth projection is currently just 2.4 percent, a level of growth that would seem unlikely to drive significant returns. It’s worth noting, however, that this projection could be on the low side if Novo Nordisk can regain its leading position in weight loss drugs or if it makes a breakthrough in Alzheimer’s treatment.
Is Novo Nordisk Worth Buying for Its Dividend?
Though things may look a little bleak for NVO’s ability to deliver massive compounding returns, the stock may be a bit more attractive from an income perspective due to its high yield. With the business expected to generate at least some forward growth and the dividend still well below Novo Nordisk’s EPS, it’s likely that management will have room to not only maintain but also possibly raise NVO’s dividend going forward. With the S&P 500’s yield currently standing at just 1.2 percent, Novo Nordisk may stand out for its ability to deliver almost three times the market average in terms of income.
Is NVO a Buy, Sell or Hold?
Despite its challenges, Novo Nordisk appears to still be a basically good business. Trailing 12-month net margin has exceeded 30 percent, and return on invested capital has been even stronger at nearly 42 percent. The business’s growth also has the potential to improve, especially if Novo Nordisk can begin competing effectively with Eli Lilly when it comes to pricing.
Looking forward, NVO has probably fallen about as far as it’s likely to for the time being, and the stock may even have become somewhat undervalued. Even so, with the GLP-1 market still uncertain and Novo Nordisk having lost its moat as the top contender to Eli Lilly, the stock may still be a bit too risky to bite on at today’s prices.
Taking the business’s performance and market position into account, NVO is likely a better stock to hold than to buy at the moment. Though it may be appealing to dividend investors, its low expected earnings growth over the next few years could create opportunity costs when compared to other investments.
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.