Has Eli Lilly Stock Peaked?

Eli Lilly (NYSE: LLY) is the most valuable healthcare stock in the world, with a market capitalization of around $720 billion. For a while, it looked like it might be on track to be the first healthcare company to top a $1 trillion valuation, perhaps as early as this year.

But over the past three months, the stock has fallen by 14% as the recent election results don't appear to be inspiring much enthusiasm around the business. Fears of heightened oversight in the industry could weigh on not just Eli Lilly, but healthcare stocks as a whole. Plus, there is also the concern that the stock's high valuation may finally be catching up to it.

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Has Eli Lilly's stock indeed peaked, and could this be the start of a much broader sell-off, or is now a potentially good time to add the healthcare giant to your portfolio?

Why Eli Lilly investors should remain bullish

There's been growing concern in the healthcare industry of late as investors worry about whether the new government may put in more restrictive measures on GLP-1 drugs and whether there will be greater scrutiny around vaccines.

For investors, however, the focus should always be on the long term. Government policies and regulations are uncontrollable and the good news is that for a business such as Eli Lilly, which is developing potentially life-changing treatments for patients, it's in a great position to grow its sales and profits for years to come.

In Eli Lilly's most recent quarter, which ended on Sept. 30, 2024, it grew its sales by 20% to $11.4 billion. It also had multiple products that generated over $1 billion in revenue, including its top GLP-1 drugs, Mounjaro ($3.1 billion) and Zepbound ($1.3 billion). Late last year, regulators approved Zepbound as a treatment option for adults with moderate to severe obstructive sleep apnea. It's a significant development as that could lead to more prescriptions and prove to be a catalyst for more revenue growth for the business in the near future.

With Eli Lilly posting strong financials and its top GLP-1 drugs still in their early growth stages, there are plenty of reasons to remain bullish on the stock when looking at it over the long haul.

How big of a problem is Eli Lilly's valuation?

The biggest concern with Eli Lilly stock may come back to its valuation. Investors have been paying a premium for the business due to its fantastic growth prospects in the anti-obesity market. But a multiple of 86 times its trailing earnings could be a tough valuation to justify for investors right now.

The good news is that when you factor in future earnings, the price may not be as steep. Based on analyst expectations, Eli Lilly is trading at 35 times next year's profits. While that may still seem high, it does suggest that given a high level of growth, its valuation should become more tenable in the future.

And when you're looking even further ahead, at the next five years, the valuation may be even more justifiable as Eli Lilly stock trades at a price/earnings-to-growth (PEG) multiple of around 0.75. Anything below a PEG of 1 is generally considered a good deal. Based on its longer-term valuation metrics, I'd argue that Eli Lilly may not be that expensive.

Is now a good time to buy Eli Lilly stock?

Eli Lilly still looks poised to hit the $1 trillion market cap in the future, and I think it's just a matter of when rather than if it will happen. And that's why it can still make for a good buy today. Its attractive opportunities in the GLP-1 drug market make it one of the better growth stocks to buy and hold for the long term.

Investors shouldn't worry too much about government policies and regulations as they aren't likely to weigh down the business in the long run. There is always going to be a need for advancements in healthcare and for companies to develop new drugs, and Eli Lilly has proven to be a leader on both fronts, which is why it can be one of the safer long-term investments to hang on to.

If you can get the stock at any kind of a discount, you shouldn't hesitate to take it. I think Eli Lilly's valuation can rise a whole lot higher. While it may be down in recent months, that doesn't mean it has peaked; the stock still has a lot of upside.

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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.