Investors should never ignore valuations when picking stocks. The price a stock trades at can drastically impact your overall returns. A metric such as the price-to-earnings (P/E) ratio can be helpful in enabling you to easily gauge how expensive or cheap a stock is.
In some cases, however, it can make sense to buy a stock that’s trading at a seemingly high P/E multiple simply because of its fantastic growth prospects. If you wait for a top growth stock to come down to a P/E of 20 or less, you may end up waiting forever and missing out on the opportunity completely.
Below, I’ll make the case for why pharma giant Eli Lilly (LLY -3.00%) still looks like a great buy right now — even though it trades at a P/E of more than 70 — and why selling the healthcare stock could be a mistake.
Eli Lilly’s growth has been accelerating — and that could continue
For years, Eli Lilly has been generating solid growth numbers — but lately, they’ve been accelerating rapidly. The company is coming off a solid quarter where its revenue rose by 45% for the last three months of 2024:
LLY Operating Revenue (Quarterly YoY Growth) data by YCharts.
The recent surge has been due to the tremendous growth Lilly has achieved due to its highly popular GLP-1 drugs, including Mounjaro (for diabetes) and Zepbound (for weight loss). Together, those two products generated $5.4 billion in sales for Eli Lilly last quarter, or 40% of the top line.
Demand has been so strong that shortages of Lilly’s GLP-1 drugs have been an issue. The company has been investing billions of dollars into increasing its production capacity at a manufacturing site in Lebanon, Indiana. And as it begins producing medicines there, potentially as early as next year, that could help boost its sales.
A new drug could open up even more growth potential
Eli Lilly is still in the early stages of its growth when it comes to GLP-1 treatments. The drugs are game changers for patients, helping them lose weight and become healthier in the process. Currently, Lilly’s GLP-1 treatments are injectables.
However, by next year, the company may have an even more attractive option for patients: a highly effective oral weight loss drug called orforglipron. By April, the company expects to release late-stage trial data for the drug, which has previously shown that on average, it can help people lose around 15% of their body weight. If the new trial results are strong, they could pave the way for approval by sometime next year.
Approval for orforglipron would not only generate a lot of bullishness for the healthcare stock, but would also provide Eli Lilly with yet another blockbuster drug, and potentially enable it to reach a broader range of patients.
Lilly looks poised to hit a $1 trillion market value
Shares of Eli Lilly haven’t been doing well in recent months, but over the long run, I think they will more than recover. This is a company whose valuation could very well top $1 trillion within the next year or two. Its market capitalization sits around $780 billion now, and reaching that pinnacle would require the stock to rise less than 30% from where it is right now.
Lilly’s P/E ratio may appear high now. But as the company scales up its operations and its profits rise, that multiple will come down, so I wouldn’t be overly concerned with it. Given its robust business and terrific portfolio of drugs, you’re likely better off simply buying and holding the stock rather than waiting for the P/E to come down, as doing so could result in missing out on some terrific gains along the way.
And while current shareholders may secure a good profit by selling it today, unless they need the money for other reasons, there’s no compelling reason to sell — this is a stock which still has a ton of upside in the long run.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
