This hyper-growth company could be the next trillion dollar stock

Companies worth more than $1 trillion are a rare breed, at least for now. Many other corporations will join this elusive group in the coming years and decades. And the next to achieve this feat could be Eli Lilly (NYSE: LLY).

The pharmaceutical giant is one of the closest to a $1 trillion market cap among those companies approaching that milestone. Here’s why the drugmaker could beat its competitors and keep growing long after.

Will the rating be a problem?

Eli Lilly’s market cap is $885 billion at the time of writing. It might not seem like a contest at these levels; the stock could easily cross the $1 trillion mark within a year. But other corporations are also nearby. At least one of them Berkshire Hathawayit’s closer, with a market cap of $930 billion.

However, the biggest reason why Lilly could still reach the trillion dollar club ahead of Berkshire Hathaway and all of its similarly sized peers is its incredible pace of growth that has been a hallmark in recent years . The company has grown faster than the next likely cohort of trillion-dollar companies, a group that includes Taiwan Semiconductor, Broadcomand adze. (Tesla was briefly worth $1 trillion at the end of 2021, but hasn’t done well since.)

However, what is the main obstacle to a trillion dollar valuation? That’s right: the assessment. Its forward price-to-earnings (P/E) ratio is 59.01 — that’s high for almost any stock. The healthcare industry average is 19.1. In other words, any perceived problem with the business could lead to a significant correction in the share price.

Meanwhile, Berkshire Hathaway’s forward P/E is a much more reasonable 19.8. But it’s important to note that many of the stocks in this cohort don’t look particularly cheap.

Again, it’s important to note that Lilly’s past performance does not guarantee that it will continue to grow faster than all other corporations within arm’s length of the trillion dollar mark. That said, the company’s financial results continue to impress.

In the second quarter, revenue rose 36% year over year to $11.3 billion. Adjusted earnings per share (EPS) rose 86% year over year to $3.92. And Lilly raised its full-year guidance for the second time this year.

Even management, who has more knowledge on the subject than anyone else, underestimates the company’s revenue and earning potential. Shares rose more than 8 percent after it released its second-quarter earnings report.

And there is even more to the story. Last year, Lilly sold the rights to Basqimi, a drug that treats hypoglycemia. Excluding the $579 million in revenue that the sale of rights to Basqimi contributed in the second quarter of 2023, the top line would have risen 46 percent. The drugmaker also recently won approval for Kisunla, a therapy for early symptomatic Alzheimer’s disease.

The story continues

It should be yet another significant growth driver for the drugmaker, given that there is a huge need in this area. Here’s the bottom line: Lilly’s stock has performed as well as it has in years, thanks to the company’s impressive clinical and regulatory progress. It is now reaping the benefits of this with hot financial results and should maintain that for the foreseeable future.

Right now, analysts on the Street expect EPS to grow by an average of 76% annually over the next five years. With such forecasts, the company’s valuation makes much more sense.

Eli Lilly TO is far outperforming Berkshire Hathaway and at least as well — or at any rate not significantly worse than other stocks in an impressive range — to reach $1 trillion first.

Beyond the $1 trillion mark

What if and when Lilly becomes a $1 trillion company? The drugmaker should continue to grow long after that. It still has several important drugs in development that look incredibly promising.

Developing innovative therapies — one of the most important aspects of a successful pharmaceutical business — is right up the company’s alley. Its pipeline currently includes products such as orforglipron and retatrutide, two potential anti-obesity drugs. Slimming treatments have recently played an essential role for Eli Lilly.

Even with increasing competition in this field, it should remain one of the leaders. Orforglipron and retatrutide could generate $8.3 billion and $5 billion in revenue respectively by 2030, according to research firm Evaluate Pharma. Both are in phase 3 studies.

Lilly’s early-stage programs include a potential gene therapy for hearing loss that has already cured one patient in a phase 1/2 trial. The company has a lot of other interesting programs beyond these.

So while reaching a $1 trillion market cap would be a major milestone for Eli Lilly, investors shouldn’t focus too much on that goal. The company is incredibly innovative and should continue to deliver market-beating performance long after it gets there. For me, stock is a mass purchase.

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Prosper Junior Bakiny has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Prediction: This Hypergrowth Company Could Be the Next Trillion Dollar Stock was originally published by The Motley Fool