Novo Nordisk’s stock may look expensive today, but that may not be the case in even a year or two.
Danish pharmaceutical company Novo Nordisk (NVO -0.86%) has established itself as one of the top healthcare stocks in the world with a market cap hovering around $600 billion. Long-term investors earned fantastic returns; in just five years, the share prices of Novo Nordisk are up over 450%. But what about investors who buy the stock today?
Does Novo Nordisk have the potential to keep generating great returns? And could those returns be strong enough to eventually make new investors into millionaires? Let’s take a look at whether the healthcare stock could make for a great buy right now.
Why Novo Nordisk still has massive growth opportunities
Novo Nordisk has multiple drugs that treat issues getting a lot of attention in healthcare — obesity and diabetes. People who are overweight or who have diabetes often have other healthcare issues as well. By focusing on these areas, Novo Nordisk’s drugs can potentially improve health conditions that go far beyond what the drugs’ initial indications would suggest.
And investors are starting to see that with glucagon-like peptide 1 (GLP-1) drugs. While they are initially approved for weight loss or diabetes, additional studies are showing their effectiveness in treating other issues as well. Wegovy, for example, was approved as a treatment for weight loss in the U.S. in 2021. But in clinical trials, it has shown that it can also help people reduce their overall cardiovascular risk. And earlier this year, the Food and Drug Administration (FDA) also approved Wegovy as a treatment to reduce the risk of serious heart problems in high-risk individuals. And now that there is greater use for Wegovy besides just weight loss, health plans are more receptive to providing coverage for the drug. Millions of people on Medicare could soon have coverage for the drug thanks to the new indication.
Novo Nordisk’s more popular GLP-1 drug, Ozempic (which is approved for diabetes), has shown that it may have wider health benefits as well. In clinical trials, it has shown that it can reduce the risk that kidney disease progresses — a potentially big concern for people with diabetes. It is not yet approved for that indication, however.
As more studies are done on these drugs, there could be far greater upside for Novo Nordisk in the future.
A growing business with strong margins could make the stock a cheap buy right now
Novo Nordisk’s sales rose by 22% during the first three months of the year to 65.3 billion Danish krone ($9.8 billion) while profits rose by 28% year over year to 25.4 billion Danish krone ($3.8 billion). One of the reasons I’m bullish on Novo Nordisk is that not only is the business growing fast, but it’s doing so while also generating some impressive profit margins.
NVO Profit Margin (Quarterly) data by YCharts.
Not only has the company consistently generated margins in excess of 20%, but those margins have been expanding. This bodes well for investors in the long run because if the company is growing its business, and it’s able to net 38 cents of every dollar of revenue as profit, then its bottom line is going to rise sharply along with revenue. That, in turn, could shrink its price-to-earnings (P/E) multiple and make the stock look cheap. Today, Novo Nordisk is trading at 46 times its trailing earnings. But with so much potential still ahead for the business, it could still be a cheap buy if you acquire the stock at its current price.
Can investing in Novo Nordisk make you a millionaire?
If Novo Nordisk can continue generating strong revenue growth while maintaining a high profit margin, then I think it would be fair to assume it could be a market-beating stock in the long run. That means it should generate better returns than the S&P 500‘s long-run annual average of 10%; perhaps it might average a return of 12% or even 13%.
Assuming Novo Nordisk stock grows at a rate of 13% for 25 years, your investment in the stock could grow to more than 21 times its original value. That means you would need to invest more than $47,000 in the healthcare stock today, which likely isn’t a realistic option for most investors.
Suppose you invested for 30 years instead. In that case, your investment could be a near-40 bagger, with an investment of approximately $25,600 today growing to $1 million by then. That may still be a bit too high for a lot of investors. But given the stock’s fairly high market cap today, it may not have as much room to grow as a smaller stock. Thus, a large investment may be necessary for it to be a millionaire-making investment.
In the end, Novo Nordisk is still a great buy. Whether you get your investment to seven figures or not, odds are you’ll generate some solid returns from owning the stock for the long haul.