Eli Lilly Has Been a Growth Beast, but This Is the Riskiest Part About Its Stock

Eli Lilly (NYSE:LLY) is the only healthcare stock in the trillion-dollar club, and for good reason. Its business has been booming due to its successful GLP-1 drugs, Mounjaro and Zepbound. They are highly effective and are dominating the market.

However, with the stock rallying roughly 400% in the past five years, its valuation has become a bit rich. Although it may still look like a tenable investment given its future growth opportunities, its continued dominance in the GLP-1 market is by no means a sure thing. Here's what investors need to know about the healthcare stock before investing in it.

There is growing competition in the GLP-1 space

The GLP-1 market is too massive for healthcare companies to ignore. Analysts at Grand View Research estimate that by 2033, it'll be worth an incredible $185.3 billion, up from $66.4 billion last year. It's growing rapidly, averaging a compounded annual growth rate of 12.4%.

When a market is this large, companies are chomping at the bit to get in on the action. Today, Eli Lilly is a market leader, but many healthcare companies are investing heavily. Pfizer acquired Metsera last year, which gave it access to some promising GLP-1 drugs. Viking Therapeutics is another stock to watch, as it may be acquired for its VK2735 drug, which has demonstrated strong results in clinical trials.

Many more companies could enter the space in the near future, chipping away at some of the impressive growth Eli Lilly has posted in recent periods. And if its growth rate slows, that could lead to a decline in its share price, since the stock isn't cheap.

Could Eli Lilly's stock be running out of room to rise higher?

There are some incredibly promising growth opportunities for Eli Lilly, not only in the GLP-1 space but also in other areas of healthcare, given its robust and diverse business. However, the stock also trades at close to 40 times its trailing earnings, which is a fairly high valuation. It can be justifiable so long as its growth rate remains strong, but it may not be easy to convince investors that it's worth paying more for.

In its most recent quarter, the company reported 48% revenue growth, but whether its growth rate can remain that high is debatable, particularly as it laps strong results from the past, and if competition intensifies in the GLP-1 market.

This year, Eli Lilly's stock is up a modest 7%. While the business is excellent, I wouldn't invest in it today since so much hinges on its continued dominance in GLP-1 and on its high growth rate. At this point, it may have more downside risk than upside potential. It could take a while for investors to generate a strong return from the healthcare stock, given its high valuation.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly and Pfizer. The Motley Fool recommends Viking Therapeutics. The Motley Fool has a disclosure policy.