What’s Behind The Recent Fall In Eli Lilly Stock?

On Thursday, August 7, Eli Lilly’s stock (NYSE:LLY) plunged by 14%, despite the company reporting a strong quarter with earnings, revenues, and guidance that surpassed market expectations. This positive performance was largely driven by the continued success of its drugs, Mounjaro and Zepbound.

The main reason for the sharp drop was an update on the late-stage clinical trial for Orforglipron, Eli Lilly’s daily oral weight-loss pill. The trial showed that patients lost nearly 12% of their body weight, which was less than the 15% analysts had anticipated. This news caused a ripple effect, boosting the stock of its competitor, Novo Nordisk, which is also developing an oral weight-loss pill. The market believes the company with the more effective drug will likely dominate the oral weight-loss market.

After this sell-off, a key question is whether Eli Lilly’s stock is now a buying opportunity. The analysis suggests that it is. Despite the recent dip, there appears to be minimal cause for concern regarding the company’s long-term prospects.

This conclusion is based on a comparison of Eli Lilly’s current stock valuation with its operational performance and financial health over recent years. A detailed analysis across key parameters—including growth, profitability, financial stability, and downturn resilience—indicates that the company has a strong operating performance and financial condition.

That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, see – Fortinet: Buy FTNT Stock At $70, Fast?

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How Does Eli Lilly’s Valuation Look vs. The S&P 500?

Going by what you pay per dollar of sales or profit, LLY stock looks very expensive compared to the broader market.

• Eli Lilly has a price-to-sales (P/S) ratio of 13 vs. a figure of 3.0 for the S&P 500
• And, it has a price-to-earnings (P/E) ratio of 42 vs. the benchmark’s 22.6

How Have Eli Lilly’s Revenues Grown Over Recent Years?

Eli Lilly’s Revenues have grown considerably over recent years.

• Eli Lilly has seen its top line grow at an average rate of 20.2% over the last 3 years (vs. increase of 5.2% for S&P 500)
• Also, its quarterly revenues grew 38% to $15.6 Bil in the most recent quarter from $11.3 Bil a year ago (vs. 4.3% improvement for S&P 500)

How Profitable Is Eli Lilly?

Eli Lilly’s profit margins are much higher than most companies in the Trefis coverage universe.

• Eli Lilly’s Operating Income over the last four quarters was $23 Bil, which represents a considerably high Operating Margin of 46.5% (vs. 18.4% for S&P 500)
• Eli Lilly’s Operating Cash Flow (OCF) over this period was $10.9 Bil, pointing to a high OCF Margin of 22.3% (vs. 19.8% for S&P 500)
• For the last four-quarter period, Eli Lilly’s Net Income was $14 Bil — indicating a high Net Income Margin of 28.2% (vs. 12.3% for S&P 500)

Does Eli Lilly Look Financially Stable?

Eli Lilly’s balance sheet looks strong.

• Eli Lilly’s Debt figure was $40 Bil at the end of the most recent quarter, while its market capitalization is $585 Bil. This implies a very strong Debt-to-Equity Ratio of 6.8% (vs. 23.9% for S&P 500). [Note: A low Debt-to-Equity Ratio is desirable]
• Cash (including cash equivalents) makes up $3.5 Bil of the $101 Bil in Total Assets for Eli Lilly.  This yields a poor Cash-to-Assets Ratio of 3.5% (vs. 6.7% for S&P 500)

How Resilient Is LLY Stock During A Downturn?

LLY stock has been more resilient than the benchmark S&P 500 index during some of the recent downturns. As investors hope for a soft landing of the U.S. economy, what could happen if another recession occurs? Our dashboard How Low Can Stocks Go During A Market Crash illustrates how key stocks performed during and after the last six market crashes.

Inflation Shock (2022)

• LLY stock fell 18.7% from a high of $272.71 on 17 August 2021 to $221.60 on 28 September 2021, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 15 December 2021
• Since then, the stock has increased to a high of $960.02 on 2 September 2024 and currently trades at around $640

COVID-19 Pandemic (2020)

• LLY stock fell 22.9% from a high of $169.13 on 8 July 2020 to $130.46 on 30 October 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 16 December 2020

Global Financial Crisis (2008)

• LLY stock fell 54.6% from a high of $60.56 on 20 April 2007 to $27.47 on 5 March 2009, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 21 April 2014

Putting All The Pieces Together: What It Means For LLY Stock

In summary, Eli Lilly’s performance across the parameters detailed above are as follows:

• Growth: Very Strong
• Profitability: Strong
• Financial Stability: Strong
• Downturn Resilience: Strong
• Overall: Strong

Overall, Eli Lilly has shown strong performance across key financial metrics. While its current valuation is higher than the broader market, this is a common trend for high-growth companies. Over the last three years, Eli Lilly’s average annual sales growth has exceeded 20%, with a remarkable 38% growth in the most recent quarter. The company’s average price-to-sales ratio over this period has been 14x.

We believe the recent dip in Eli Lilly’s stock presents a compelling opportunity for long-term investors. However, it’s crucial to acknowledge the potential risks. Our optimistic view could be challenged by concerns over future growth or broader market trends in the pharmaceutical industry, including the potential tariffs on pharmaceuticals imported into the U.S.

The company also faces significant competition from rivals like Novo Nordisk, a major player in the weight-loss market. Novo Nordisk is developing its own daily weight-loss oral pill, which could potentially prove more effective than Eli Lilly’s. Investors should be prepared for the possibility of the stock falling an additional 30-40% from its current price. See – Buy or Sell LLY Stock – for more details.

Despite these risks, even if the market is currently discounting Eli Lilly’s valuation due to Novo Nordisk’s potential lead in the oral weight-loss pill race, the company’s strong fundamentals and operational performance suggest continued robust revenue growth. This is largely thanks to its GLP-1 portfolio and pipeline. Related – Eli Lilly Diversifies With Verve Gene Therapy Deal.

Given the immense potential of the obesity treatment market and Eli Lilly’s recent improvements in sales and profitability, its valuation multiples could expand beyond historical averages. We anticipate strong gains for investors with a three- to five-year investment horizon. Furthermore, analysts’ average price estimate of $945 implies a nearly 50% upside for Eli Lilly.

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