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Eli Lilly - The Pharmaceutial Company for the Future

Pharmaceuticals giant Eli Lilly (LLY: $730) blew past estimates during its fourth quarter results Monday night after the close, posting $9.4 billion in revenues, up 28% YoY, compared to $7.3 billion a year ago. Profit was $2.2 billion, or $2.49 per share, against $1.9 billion, or $2.09, driven by the strong response to its new anti-obesity drug, Zepbound, coupled with price increases for its blockbuster diabetes treatment, Mounjaro.

For the full year, the company produced $34.1 billion in revenues, up 20% YoY, from $28.5 billion during the same period last year. Profits for the year, however, took a dip, dropping from $7.2 billion, or $7.94 per share, to $5.7 billion, or $6.32. This was largely the result of various in-process research and development charges, most of which were acquired by the company over the past few quarters.

During the quarter, the company’s incretins, or drugs that work by mimicking hormones led the way in terms of growth, with Mounjaro posting sales of $2.2 billion during the quarter, up 700% YoY, followed by its GLP-1 candidate, Zepbound, at $176 million which was just introduced in the quarter. Other key growth drivers include Verzenio, Jardiance, and Tyvyt*, up 42%, 30%, and 98%, respectively. Please re-read the first sentence of this paragraph.

* a medication used to treat Hodgkin's disease

A few detractors included the likes of Trulicity, Humalog, and Alimta, down 14%, 33%, and 81% YoY, respectively. This was largely owing to lower realized prices, coupled with persistent supply constraints in recent months. The lower prices weren’t that surprising, with the company announcing last year that it would be cutting the prices of Humalog, and its other insulin products by as much as 70% going forward

The big story about the company, however, is its new obesity play, Zepbound, which has gained strong momentum within just a few months after its launch, and is already threatening Novo Nordisk’s dominance in this space. Lilly expects demand for this drug to far outstrip supply for 2024, as it grapples to build capacity with a fresh $3 billion commitment to expand manufacturing.

Given the pace at which incretins are expanding within the US and internationally, with the entire market expected to hit $50 billion in 2030, the drug now has 90% insurance coverage and Medicare Part D. Sales are only going to heat up from here, with Morgan Stanley projecting sales for Zepbound for 2024 to be $2.2 billion. As noted above, Zepbound did just $176 million last quarter. Barclays forecasts $7.3 billion in 2024 sales for Wegovy, which as you know is made by Novo Nordisk (NVO).

In addition, Eli Lilly is working to unveil its oral weight loss drug, Orforglipron. This could be very important as all of the weight-loss drugs on the market are injectables. When you can just take a pill, this market will explode.*

* https://www.nejm.org/doi/full/10.1056/NEJMoa2302392    Read this report from September 2023. If this doesn’t get you excited about owning Eli Lilly, there is nothing we can ever say that will do so.

Following a 60% rally in 2023, the stock is already up 20% so far this year, starting at $592 on January 2nd, and is showing no signs of cooling down. The new all-time highs hit by the stock this week and all of this year, are perfectly justified. How can I buy this stock at such a high price, you are asking yourself? Very easy. Think 2025, 2028, 2030. Then sit down at your computer and buy the stock!

In addition to investing in R&D and expanding its productive capacity, Eli Lilly is increasingly generous in returning capital, with its sixth consecutive yearly dividend increase, doubling it since 2018. It ended the quarter with $2.6 billion in cash and $20 billion in debt. Our Target is $665 and we would not sell Eli Lilly. Whoops. We have to raise our Target again. It hit $742 during the day yesterday, and closed at $705, up $37 for the day. If the stock market continues its bull market run this month and on into the spring and summer, we wouldn’t be surprised to see the stock with a 9 in front of it. Our new Target is $825.

Apple Reports Earnings. Market Not Thrilled

Consumer tech giant Apple (AAPL: $182) released its first quarter results last night, posting $120 billion in revenue, up 2% YoY, compared to $117 billion a year ago. The company posted a profit of $34 billion, or $2.18 per share, against $30 billion, or $1.88, beating consensus estimates on the top and bottom lines. The YoY growth during the quarter marks an end to four consecutive quarters of declining sales for the company, and it produced a beat on sales estimates across most of its product lines.

Apple’s strong showing during the quarter was driven by its flagship iPhone, with $70 billion in sales, up 6% YoY, compared to $66 billion a year ago. This was followed by the Services segment at $23 billion, up 11% YoY, compared to $21 billion, and iPad, Mac, and other product revenues at $7.0 billion, $7.8 billion, and $12.0 billion, down by 25%, 1%, and 11%, on a YoY-basis, respectively. This is largely the result of the company not having launched any new products across these categories in recent months, further aggravated by the fact that it had just 13 weeks of business during this quarter, compared to 14 last year. Apart from this, products such as the Apple Watch were removed from store shelves for a few days owing to a patent dispute with medical devices company, Masimo.

It was bound to get tough extracting more growth, and continually innovating with its long-running range of products. Fortunately, Apple has found another winner in its Vision Pro headset, with the $3,500 spatial computing device already hitting 200,000 units in presales, weeks before it was set to arrive in stores, giving rise to another major product line with a multi-billion dollar sales potential. We are a little bit skeptical about how successful this product will be. One of our favorite podcasters, Scott Galloway, a brilliant mind, believes it will never sell.

Apple’s eye-popping $2.9 trillion valuation might seem excessive to some, but the company still trades at just 7 times sales and 28 times earnings. While it seeks newer avenues to monetize its brand and drive growth, investors are well taken care of with $24 billion being returned in the form of buybacks and dividends, made possible by its massive $62 billion in cash reserves, $124 billion in debt, and $110 billion in cash flow. The debt is quite high in our opinion, but most of it is at sub-5% interest rate levels.

Our Target is $225 and our Sell Price is that we would not sell Apple. We’re a little concerned about the stock, though. Not the company, but the stock. It is SO BIG, that for it to get back to 10-15% growth levels, is not easy. To add 10% to revenues it would have to produce $28 billion in new business, an astounding number. The company could conceivably do it with major acquisitions, which it is not prone to do, or by moving into new areas, like the Apple Car. But these things are a long way off and meanwhile, revenues stagnate. Wall Street doesn’t like stagnation. The stock hasn’t participated in the strong market this year, peaking on December 14th at $200, and is off 10% in the last six weeks – losing $300 billion in market cap. It’s lost its leadership as Microsoft has passed it by in the market cap race.

So what to do? As always, it’s a tough call. We are big believers in letting the market tell us what to do. It’s down $6 (3%) after earnings early Friday morning as we write this, and the market looks strong starting out today. We would suggest setting a stop and if the market goes there, taking your cash and looking for other places for it. There are certainly a lot of great choices out there. We are going to lower our Target to $200 and are setting a Sell Price of $174. We added the stock at $24 in $2016, so we are happy for all of you who did the same. Perhaps the growth game is over now for Apple for a while. Will the company go away? Of course not. But it may stagnate here in the $170-$200 range for the next year or so…. and "stagnation" is a word Wall Street doesn’t like.

Twilio Gets Mild Applause . . . But Show Us The Growth!

Twilio (TWLO: $56) released its third-quarter results on Wednesday, reporting $1.03 billion in revenues, up barely 5% compared to $980 million a year ago. The company posted a profit of $110 million, against a loss of $50 million, or $0.29, with a beat on estimates at the top and bottom lines, coupled with a raise in the full-year guidance leading the stock to rally following the results.

The company has continued its streak of steady customer acquisitions, now serving 306,000 active accounts, up from 280,000 a year ago. Twilio, however, experienced a significant trough in its net dollar-based expansion rate at 101%, down from 122% last year. This can mostly be attributed to higher contraction and churn in its customer data platform, Segment, which it acquired a few years ago, coupled with slower growth across its other products.

Twilio is a cloud communications platform that enables businesses to build and deliver customer engagement experiences across multiple channels, including voice, text, chat, and video. Its platform is highly flexible and scalable, making it easy for businesses of all sizes to get started and grow. Its business model is based on a subscription fee for access to its platform and APIs. Twilio charges businesses based on the number of messages, calls, and other communications they send and receive through its platform.

Twilio's platform is easy to use, even for businesses with no prior experience with cloud communications, and it provides a variety of resources and support to help businesses get started and use its platform effectively.

Twilio integrates deeply with other popular cloud platforms, such as Salesforce, Shopify, and Amazon Web Services. This makes it easy for businesses to build end-to-end customer engagement solutions that leverage the best-of-breed technologies. The company offers several AI-powered features that help businesses automate and personalize their communication experiences. For example, its Predictive Dialer can automatically dial leads based on their likelihood of converting, and Twilio's Voice Intelligence can transcribe and analyze phone calls for insights. The platform is available in over 180 countries, giving businesses the ability to reach their customers wherever they are.

Twilio had a number of sizable new customer acquisitions during the quarter, which included a leading Latin American eCommerce platform, one of the largest North American financial services companies, and more. The company further signed a landmark agreement with Softbank, which will now be offering Twilio’s services through its channels for the Japanese market, helping its foray into Southeast Asia.

Investors appreciate the remarkable synergies that the company’s products, platforms, and copious amounts of user data are helping create. This makes Twilio’s efforts in generative AI and machine learning all the more meaningful, creating substantial moats against competitive forces going forward, all the while helping enterprise customers drive efficiencies and cost savings.

The stock is up 14% YTD but is still down dramatically since its peak in 2021, and as such it now trades at a little over 2 times sales. In addition to this, Twilio has over 30% net cash, meaning that its cash reserves at $3.9 billion, make up a significant portion of its market cap of $10 billion. The company is using this to repurchase stock with $1 billion in authorizations, having just $1.2 billion in debt, and $130 million in cash flow.

We would like to see revenue growth move higher in this coming year, as the company has a history of strong revenue growth. The last four years were $1.1 billion, $1.8 billion, $2.8 billion, and $3.8 billion. But 2023 is looking to hit just $4.1 billion. The company is now profitable, after years of waiting, which we are quite pleased about. And that bottom line trend is what Wall Street cares about now and it's ramping up fast. Consensus is looking for 30% earnings growth next year. Admittedly, we're here for the historical hypergrowth revenue narrative, so if sales don’t pick up, we will have to consider moving on to something more exciting. It could happen. Quite a few people think sales will hit $4.6 billion next year, which gets the engine humming again.

For now, our Target remains $135 and the stock is below our Sell Price of $65. In light of the revenue slowdown, we have to lower our Target to $80 and we are going to set a hard stop at $53 where it was last week. If it moves back down, we will have to let this wonderful company go. We added it at $52 in 2016 and watched it shoot higher to $400 two summers ago. It will hit that level again some day . . . but the slower sales growth gets, the longer that scenario will need to play out.


Meta Earnings Rocket Higher, Shattering Expectations

Meta Earnings Rocket Higher, Shattering Expectations

Meta Platforms (META: $301), the company behind Facebook, WhatsApp, and Instagram, released its third quarter results last week. It posted $34.1 billion in revenues, UP 23% YOY, compared to $27.7 billion, with a profit of $11.6 billion, or $4.39 per share, up by a mammoth 164%, compared to $4.4 billion, or $1.64, with a beat on consensus estimates for the coming quarter on the top and bottom lines.

Other key figures and metrics were just as exemplary, with daily active users across its family of apps at 3.14 billion, and monthly active users nearing 4 billion, both up by 7% YoY. Ad impressions across its platforms increased by 31% YoY, making up for the 6% decline in the average price of its ad inventory. All in all, this was a BLOCKBUSTER of a quarter for the company.

The company is fighting some growing legal, regulatory, and reputational risks. To start with, attorney generals from across the country have filed lawsuits against Meta for its addictive features, and 33 US states are now suing the tech giant for collecting data from young users without parental consent. Meta has always been mired with legal issues, ranging from antitrust to Congressional Hearings pertaining to political advertising and targeting. Time and time again, it has managed to rise above it all, with often nothing more than a slap on the wrist. So, we see no reason why it would be any different this time around, making this muted reaction nothing more than a minor overreaction.

In other news, the company is going all-out in pursuit of the Metaverse, now in partnership with Ray-Ban, and more realistic visuals. This is infinitely better than the earlier version, where people in the Metaverse resembled Sims characters. The new Metaverse looks ready to take on the likes of Zoom and Microsoft Teams when it comes to communications, making it an absolute game changer.

Following extensive cost-cutting measures, which involved laying off 24% of its workforce, Meta is now a lean, mean fighting machine. The stock is up by a stellar 140% YTD, and still remains off by about 22% from its all-time high of $384 set in 2021. The company is a cash machine, which helps support its generous $3.7 billion in repurchases, further aided by its $61 billion in cash reserves, $37 billion in debt, and $66 billion in cash flow. Our Target is $350 and we would never sell Meta Platforms. If revenues and earnings continue at this pace in the 4th quarter, and given a solid stock market, we can see that we might have a problem with the Target. We’d just have to raise it to $425.



Dexcom Hit Big Numbers for the Quarter

Leading manufacturer of continuous glucose monitoring systems, Dexcom (DXCM: $88), released its third quarter results last week, reporting $975 million in revenues, up 27% YoY, compared to $770 million a year ago. The company posted a profit of $200 million, or $0.50 per share, against $110 million, or $0.28, with the spectacular beat on consensus estimates for the coming quarter leading the stock to pop 10% to $89 following the results.

In addition, the company raised its guidance for the full year, now expecting revenues between $3.57 and $3.60 billion, with a YoY growth rate of 24%. These figures can largely be attributed to the rollout of its G7 device, which saw quick traction owing to the company’s solid base of over 18,000 physicians already writing scripts for its products, along with the brand it has painstakingly built over the years.

Another key catalyst for the company was realized in recent months with Medicare coverage for its continuous glucose monitoring devices going live for people with Type 2 diabetes using basal insulin only. It also includes certain non-insulin individuals with hypoglycemia, bringing its total potential customer base within the US alone to about 7 million people, with the figure only set to rise from here.

Dexcom saw similar dynamics play out across various international markets, particularly in France, where Dexcom One has secured reimbursement for all patients on intensive insulin therapy. In addition, the company witnessed a sizable uptick in sales from Japan, which was the first to establish broad reimbursement for diabetics late last year, representing over 1 million patients.

Dexcom is a medical technology company that develops and manufactures continuous glucose monitoring (CGM) systems. CGM systems provide people with diabetes with real-time information about their blood glucose levels, which can help them to better manage their diabetes. Dexcom's CGM systems are used by over a million people worldwide.

Dexcom is well-positioned for growth in 2024 and beyond. The company has a number of new products and ideas in the pipeline that could propel the stock higher. Here are a few examples:

  • G7 CGM system: The G7 CGM system is Dexcom's next-generation CGM system. It is smaller, more accurate, and easier to use than Dexcom's previous CGM systems. The G7 CGM system is expected to be launched in the United States in early 2024.
  • Dexcom ONE CGM system: The Dexcom ONE CGM system is a lower-cost CGM system that is designed to make CGM more accessible to people with diabetes. The Dexcom ONE CGM system is expected to be launched in the United States in mid-2024.
  • Implantable CGM sensor: Dexcom is developing an implantable CGM sensor that would eliminate the need for people with diabetes to wear a patch on their skin. The implantable CGM sensor is expected to be launched in the United States in 2025.
  • CGM integration with other devices: Dexcom is working to integrate its CGM systems with other devices, such as insulin pumps and smartwatches. This integration would allow people with diabetes to manage their diabetes more easily and effectively.

In addition to these new products and ideas, Dexcom is also benefiting from a number of other factors, including:

  • Growing demand for CGM systems: The demand for CGM systems is growing rapidly as more and more people with diabetes recognize the benefits of CGM.
  • Expanding reimbursement coverage: More and more insurance companies are reimbursing for CGM systems, which is making CGM more affordable for people with diabetes.
  • International expansion: Dexcom is expanding its international presence, which is opening up new markets for the company's CGM systems.

The stock is down 21% YTD but has been on an ascendant streak over the past three weeks after hitting the 52-week low of $75 on October 12th. Another great piece of news for investors is the announcement of a $500 repurchase program, creating additional support for the stock while rewarding shareholders generously, made possible by over $3.2 billion in cash reserves. The company has $2.7 billion in debt and $750 million in cash flow. Our Target remains $120 with a Sell Price of $81. This is no small company, clocking in with a market cap of $34 billion.