1 Reason Eli Lilly Stock Is Still a Buy

Despite its leadership in the weight-loss medicine market, Eli Lilly (NYSE: LLY) is not performing well this year, with its shares down 15% to date. Some worry that the drugmaker will eventually face stiff competition in its core niche, eroding its pricing power and profits. However, Eli Lilly has several strengths that should help it perform well over the medium term, even beyond its deep pipeline. Let's look at one reason the stock could deliver strong returns through the next five years.

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Eli Lilly's expanding margins

Since 2020, Eli Lilly's gross and operating margins have improved noticeably. The company's margins as of the fourth quarter of 2025 are higher than those of its similarly sized peers.

LLY Gross Profit Margin (Quarterly) data by YCharts

Eli Lilly has benefited from rapidly growing sales of GLP-1 brands like Zepbound and Mounjaro for the treatment of obesity and diabetes, respectively. However, that might not be the whole story. The margin improvements tell us that sales are growing much faster than expenses, which may indicate that Eli Lilly is manufacturing its drugs more efficiently, among other factors. Management's comments confirm that theory. In recent earnings calls, the company has credited, in part, improved production costs.

Now, there are threats to Eli Lilly's margin expansion. The company has noted that lower-realized prices for some of its products have offset some of the margin gains driven by improved costs of production. As more anti-obesity drugs enter the market, things could get even more challenging on that front. However, there are also reasons Eli Lilly could maintain relatively high margins over the medium term, even beyond new, potential best-in-class drugs it could launch. Here are two of them.

First, Eli Lilly is investing heavily in expanding its manufacturing capacity. The company has done so to the tune of $55 billion since 2020. These investments may harm profits and margins in the short run, but they should eventually help boost the company's manufacturing capacity while lowering costs, thereby driving significant economies of scale. Second, Eli Lilly's investments in artificial intelligence (AI) could also have an impact, although not immediately. Eli Lilly built the largest supercomputer in the pharmaceutical industry with the assistance of Nvidia.

The company's goals include accelerating drug discovery, efficiently designing clinical trials, and more. Even small, perhaps 5%, cuts to the time and money it typically takes to get a brand-new compound from the lab into the clinic may have an impact across the entire business, helping lower expenses and boost margins. So, investors should keep an eye on Eli Lilly's AI-related efforts. Meanwhile, the company's strong revenue and earnings growth, and an industry-leading lineup and pipeline in one of the fastest-growing therapeutic areas, make the stock attractive.

Prosper Junior Bakiny has positions in Eli Lilly and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.