How Eli Lilly Outperforms Nvidia—Here’s One Graph

Go over there, AI. The real bubble is not in artificial intelligence, but in weight loss. Wall Street is hyperventilating over Nvidia and OpenAI’s ChatGPT. But another giant began to expand. Hey guys, let’s talk about Eli Lilly.

There is an interesting point in the graph below. Nvidia, a child of the AI ​​revolution, is seeing its stock skyrocket. However, Eli Lilly’s stock price has been even more volatile.

It’s not just the stock price that is surprising. Eli Lilly’s price-to-earnings ratio, a measure of how much investors are willing to pay for each dollar of profit, has also expanded into uncharted territory. What is driving this meteoric rise? obesity.

weight loss moonshot

If data is the new oil and AI is the new energy, losing weight is the ultimate moonshot. Eli Lilly is in the spotlight among investors thanks to its obesity drug Munjaro. But here’s the problem. Eli Lilly isn’t the only game in town.

Enter Novo Nordisk and its leading contender Ozempic. Eli Lilly does not own the obesity market. That’s not how Google dominates the search market. Or Microsoft has a monopoly on enterprise software. Obesity drugs are a duopoly at best. Eli and Novo are here. It’s like Pepsi versus Coca-Cola.

Despite this, investors seem determined to continue down the path. Eli Lilly’s P/E ratio is more than twice that of Novo Nordisk. Meanwhile, other pharmaceutical giants such as Roche, J&J and AstraZeneca have industry average P/E ratios of around 30x. what is going on?

peter lynch perspective

Pass on the wisdom of Peter Lynch. He is a legendary fund manager who wrote “One Up on Wall Street.” He talked about how much he avoided popular stocks. He believed that the higher something climbed, the harder it was to fall.

In Lynch’s world, a high P/E ratio isn’t inherently a bad thing. But that means all of the high growth prospects are already factored into the current stock price. And with Eli Lilly trading at twice the price of Novo Nordisk, investors expect Lilly to grow twice as fast over the next few years in a boxing ring situation with Novo. means. And Lilly will grow three times faster than the industry average as a pharmaceutical company.

Why are investors and analysts so excited? I think this is an escalation of collective commitment. It’s a fancy way of saying that once Wall Street falls in love with a stock, its stock price tends to double. Analysts who have issued buy recommendations so far may be reluctant to back down. If the institutional investors who bought into the stock decide to sell it, there will be a lot of explaining to do. And even if three national magazines are pandering to the CEO, no one is going to stick their neck out and sing a different tune until something clearly goes wrong.

Is the FDA friend or foe?

Maybe another sinister push came from the FDA. It recently issued guidelines that prohibit pharmacies from dispensing “me-too” products that imitate branded obesity drugs. During shortages, pharmacies were allowed to manufacture substitutes containing the same active ingredient, essentially allowing them to temporarily infringe on the patent. Then last week, the FDA suddenly declared that the obesity drug shortage was over. Therefore, there are no more counterfeit products. Although, of course, supply chain issues still remain. Patients are reported to be unable to obtain the medicines they need. The branded version is much more expensive, so people who could previously afford the drug may no longer be able to do so.

We can’t say for sure, but the FDA definitely seems to favor Big Pharma. It seems as if they came out to protect existing companies before solving operational problems. We don’t know if governments are focused on expanding access or saving corporate profits for consumers. Bad optics, that’s all I can say.

Performance and transformation

For Eli Lilly, or any other company, to achieve long-term success, it must perform in the short term while transforming for the long term. That means sorting out current supply chain issues, meeting market demands, and proactively investing in the next technology platform.

Remember Angry Birds? All the kids and adults were playing it, and then all of a sudden they stopped playing. Being a one-hit wonder is a risky business model. All novelty eventually wears off.

Obesity drugs may be the center of attention right now, but patents can expire, competitors can catch up, and the market is constantly evolving. One of the most difficult but most important strategies for successful companies is to temper market expectations. It may seem counterintuitive, but why would you want to downplay your success? Because you want to make room for being far better than the alternative and exceeding its expectations. Overdue delivery, under-promised. Expectation Management 101.

Mark Zuckerberg gave a masterclass on this. When Apple changed iPhone privacy settings, Facebook’s ad revenue decreased. Rather than cover up the situation, Zuckerberg came clean. In fact, he screamed and screamed about how bad the situation was. He tempered Wall Street’s expectations. This gave Zuckerberg time to build better predictive algorithms. A few years later, Meta is back on track. And he could even afford to invest in the Metaverse, then beautiful Ray-Ban goggles, and now Gen AI video software for Facebook users.

The same goes for Netflix and Spotify. Both companies were once go-to stocks that fell but have come back to life with more realistic P/E ratios. The second time around, it came back with solid revenue and profits. It’s not just that the P/E ratio is inflated.

All bubbles eventually burst. The question is not “if” but “when.” After all, sustainable growth always outweighs temporary highs. You can sleep well at night too. And as history has shown, the bigger the bubble, the louder it pops.