Eli Lilly Expects Up to $87 Billion in 2026 Revenue. Here's Why the Stock Still Looks Undervalued.

Eli Lilly (NYSE: LLY) stock has soared 400% over the past five years, and though the momentum slowed in the early months of this year, it's now on the rise again. The stock has advanced 25% over the past six months, buoyed by optimism about Lilly's weight loss drug portfolio. Lilly is the maker of tirzepatide, sold under the names Mounjaro for type 2 diabetes and Zepbound for weight loss, and these blockbuster products have been driving explosive revenue growth.

Demand for this type of drug has been high worldwide, and Lilly has established itself as the leader, surpassing Novo Nordisk. In fact, the performance of its weight loss drugs has been so strong that Lilly now expects up to $87 billion in revenue this year. That compares to $65 billion in revenue last year.

Though Lilly stock has climbed, it makes a reasonable buy today. Let's check out why this stock still looks undervalued.

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How GLP-1 drugs work

So first, let's start with a few words about the GLP-1 market. This class of drugs interacts with hormonal pathways involved in the control of appetite and blood sugar levels -- and as such, is the key to weight loss. These drugs are easy to self-administer weekly by injection, and just this year, both Lilly and Novo have also launched GLP-1 drugs in oral formulations. GLP-1 drugs have proven their safety and efficacy in clinical trials and in the real world, and individuals seeking to lose weight have rushed to get in on them.

A couple of years ago, regulators even announced a GLP-1 shortage, but Lilly and Novo ramped up production, and the products are now back on the shelves. Novo was earliest to market with its GLP-1 drugs, Ozempic for type 2 diabetes and Wegovy for weight loss, but as mentioned, Lilly has slipped ahead. Novo's oral Wegovy, however, still has won more prescriptions than Lilly's pill, Foundayo, but it's important to keep in mind that oral Wegovy launched a few months earlier. So, it's too early to draw conclusions about which company may dominate in the oral GLP-1 space.

Demand for weight loss drugs has helped power Lilly's revenue higher; in the recent quarter, for example, Mounjaro and Zepbound drove a 48% increase in total revenue to $23 billion. Together, they accounted for more than $14 billion of that revenue.

Eli Lilly's valuation today

Now, let's consider why Lilly still looks undervalued even after its big gains. Right now, Lilly trades for about 32x forward earnings estimates, which is below its levels of a few years ago, when revenue was considerably lower.

LLY PE Ratio (Forward) data by YCharts

Meanwhile, analysts are optimistic about revenue to come. As mentioned, Lilly forecasts as much as $87 billion for the current full year, and the average analyst estimate calls for revenue of more than $100 billion in the following year.

At the same time, Lilly's weight loss portfolio isn't restricted to only a couple of products. The company has a solid weight loss drug pipeline, with exciting late-stage products that could be the revenue drivers of the future. For example, the pharma giant recently reported positive results from a phase 2 study of EloraTZP, a combination of eloralintide and tirzepatide -- in the trial, it delivered greater weight loss than tirzepatide alone. Lilly aims to initiate a phase 3 trial before the end of the year. The company is also studying retatrutide, another candidate with potential for greater weight loss, in phase 3 studies.

This is positive because, in the future, if Lilly sells several weight loss drugs, it can suit the needs of a variety of individuals. Some may like the convenience of a weight loss pill, while others may go for a drug that offers the potential for more or less weight loss, according to their particular needs.

The ongoing demand in today's weight loss drug market and the strength of Lilly's weight loss pipeline, which may produce additional drugs in the future, are reasons to believe that revenue could continue to march significantly higher. This is why today, even after its gains, Eli Lilly stock still looks undervalued.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly and Novo Nordisk. The Motley Fool has a disclosure policy.