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Weight Loss Stocks vs. AI: How Eli Lilly Outpaces Nvidia—Here Is One Chart
On November 26, we’ll release the next Future Readiness Indicator covering Pharma, Technology, and Fashion. And if you happen to be in London, here is an event you can sign up for!
But for now, move over, AI. The real bubble brewing isn’t in artificial intelligence—it’s in weight loss. Wall Street has been hyperventilating over Nvidia and OpenAI’s ChatGPT, but another titan has started to inflate. Everyone, ladies and gentlemen, let’s talk about Eli Lilly.
There’s something curious about the chart below. Nvidia, the poster child of the AI revolution, has seen its share price skyrocket. But Eli Lilly’s stock has been on an even wilder ride.
It’s not just its share price that’s eye-popping. Eli Lilly’s price-to-earnings (P/E) ratio has also ballooned up into uncharted territory. What’s fueling the meteoric rise? Obesity.
The Moonshot of Weight Loss
If data is the new oil and AI is the new energy, then losing weight is the final moonshot. Eli Lilly has been in the limelight among investors thanks to its obesity drug, Mounjaro. But here’s the problem: Eli Lilly isn’t the only game in town.
Enter Novo Nordisk and its heavyweight contender, Ozempic. Eli Lilly doesn’t own the obesity market. Not the way Google dominates the search market. Or Microsoft dominates enterprise software. Obesity drugs are a duopoly at best. There’s Eli and there’s Novo. Just like Pepsi vs. Coca-Cola.
Despite this, investors seem to have made up their one-track mind. Eli Lilly’s P/E ratio is more than double that of Novo Nordisk. Meanwhile, other pharmaceutical heavyweights like Roche, J&J, and AstraZeneca are trading at industry-average P/E ratios of around 30. What’s going on?
The Peter Lynch Perspective
Let’s channel the wisdom of Peter Lynch. He’s the legendary fund manager who penned One Up on Wall Street. He told us how much he had avoided hot stocks. The higher something climbs, the harder it will fall, he believed.
In Lynch’s world, a high P/E ratio isn’t inherently bad. But it does mean all the high growth prospects have already been priced into the current share price. And for Eli Lilly to trade at double that of Novo Nordisk, it means investors are expecting Lilly to grow twice as fast in the coming years in a boxing ring situation against Novo. And Lilly would grow three times faster than the industry average as a drugmaker.
Why are investors and analysts so smitten? I think it’s the collective escalation of commitment—a fancy way of saying that once Wall Street falls in love with a stock, it tends to double down. Analysts who have previously issued “buy” recommendations may be reluctant to backpedal. Institutional investors who have bought in, if they were to unload, would have a lot of explaining to do. And if three national magazines have fawned over the CEO, no one is going to stick their neck out singing another tune until something clearly is not working.
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Friend or Foe at the FDA
Maybe one more sinister boost came from the FDA. It recently issued guidelines forbidding pharmacies from compounding “me-too” products that mimic the branded obesity drugs. During the shortages, pharmacies were allowed to manufacture alternatives with the same active ingredient, essentially allowing them to infringe on patents temporarily. Then last week, the FDA abruptly declared that the shortages of obesity drugs are over. So no more copycat stuff. Even though, of course, there are still lingering supply chain issues. Patients reportedly cannot access the needed drugs. The branded version is far more expensive, so those who had been able to afford the medication, now may no longer.
I can’t tell for sure, but the FDA surely appears to be cozying up to Big Pharma. It looks as if it’s out to protect incumbents before they’ve even sorted out their operational hiccups. I don’t know if the government is looking out for consumer interest in broadening access or saving the corporate bottom line. Bad optics, that’s all I’ll say.
Performing and Transforming
For long-term success, Eli Lilly—or any company, for that matter—needs to perform in the short term while transforming for the long haul. That means sorting out current supply chain issues, meeting market demand, and investing aggressively in the next technological platform.
Remember Angry Birds? Kids and adults were all playing until suddenly they weren’t. Being a one-hit wonder is a risky business model. Every novelty wears out eventually.
Obesity drugs might be the hot ticket now, but patents will expire, competitors can catch up, and markets always move on. One of the hardest but most crucial strategies for a company riding high is to temper market expectations. It might seem counterintuitive—why would you want to downplay your success? Because you want to create room to exceed those expectations, which is far better than the alternative. Overdeliver, underpromise. Expectation management 101.
Mark Zuckerberg provided a masterclass in this. When Apple changed iPhone privacy settings, Facebook’s ad revenue slowed. Instead of sugarcoating the situation, Zuckerberg came clean. In fact, he screamed and shouted about how bad the situation would be. He tempered Wall Street’s expectations. That gave time for Zuckerberg to build better predictive algorithms. Fast-forward a few years, and Meta is back on track. And he has even had the spare money to invest in the Metaverse, then the beautiful Ray-Ban goggles, and now Gen AI video software for Facebook users.
Same thing for Netflix and Spotify. They were both once go-go stocks that went down and made a second comeback with a more realistic P/E. The second time, they came back with strong earnings and stronger revenue. Not just an inflated P/E.
All bubbles eventually burst. The question isn’t if, but when. At the end of the day, sustainable growth beats a fleeting high every time. You can also sleep better at night. And as history has shown us, the bigger the bubble grows, the louder it bursts.
Stay one inch ahead,
Howard
P.S. Do you think we’re witnessing another bubble elsewhere? Are there companies you think are dangerously overvalued? I want to hear your thoughts—share and join the conversation in the comments below!
