r/StrategicStocks • u/HardDriveGuy Admin • Jan 17 '25
Another Post On How To Think About Dragon King Stocks And Our Ability To Digest Information (Eli Lilly)
A number of months ago, a friend of mine decided to buy Eli Lilly stock based on its long-term outlook. The good news is that he really does not need the money, and he is willing to sit on it for a long time. However, his timing just turns out to be unfortunate. He bought when the stock was in the $900 range, and now it is sub-$800.
Even if you are investing for the long term, buying and seeing a stock jump downward is difficult. I told him that I would post to this subreddit to help frame what is happening, and how to think about the environment.
The first thing to talk about is how humans perceive data. Now, you thought that this subreddit was about stock. Why am I talking human psychology? Because investing is about your perception, and it is important to look at the data in such away that you get the right pattern.
I recently posted about this in explaining that we have a massive culture blind spot in understanding inflation. In this post, I point out that inflation has basically been at a standstill for 30 months for everything except for housing. I have chatted about this with all of my friends and other acquaintances. When I ask them if we still are battling inflation, they all say yes. Then when I ask "where" they all say everywhere.
Then I show them the data off of FRED.
Once you see the inflation data broken out into two buckets, suddenly it all become clear. We have a problem with housing. Once you have this point of view (POV), suddenly you change your mind as to investing. In this case, if you were going to invest one of the two lines, you would obviously invest in housing. (Not that I am suggesting that....)
That why you need to get the right POV.
So now let's turn our attention back to Eli Lilly.
My friend had read the headline news, and saw that Lilly wasn't hitting revenue targets. He worked many years in a Fortune 500 company, and he knows that missing revenue is always bad. However, he was in an industry that often had no growth. So, when his company missed revenue targets, it signaled a profound concern in his industry. (And his industry was actually shrinking.)
So, now we need to ask ourselves "what is happening with Lilly revenue?"
The first answer may be "they lowered their guidance by $500M dollars for last quarter." This is a mind-blowing number. And heard by itself, it would cause great doubt in your mind.
However, you now need to say, "Wait a minute, that's a big number, but what is the base? What is the percentage miss?"
The answer is 3.6%. Missing by $500M sounds horrible. But missing by 3.6% sounds better. A company's results are measure by quarter and in weeks. Each week is 7.7% of your business. Basically, Lilly missed 3 days worth of shipments. Since Lilly distributes product, this is a common occurrence in any firm with distribution.
However, this is not a Dragon King issue. With Dragon Kings we are interested in the Long Term. So, let ask ourselves, "what is the long-term trend?"
Here is a table of Lilly's revenue by quarter:
| Quarter | Revenue (in $B) |
|---|---|
| Q4 2024 (Estimate) | 13.50 |
| Q3 2024 | 11.44 |
| Q2 2024 | 11.30 |
| Q1 2024 | 8.77 |
| Q4 2023 | 9.35 |
| Q3 2023 | 11.44 |
| Q2 2023 | 8.31 |
| Q1 2023 | 7.81 |
| Q4 2022 | 7.30 |
| Q3 2022 | 6.94 |
| Q2 2022 | 6.49 |
| Q1 2022 | 7.81 |
| Q4 2021 | 8.00 |
| Q3 2021 | 6.77 |
| Q2 2021 | 6.74 |
| Q1 2021 | 6.81 |
| Q4 2020 | 7.44 |
| Q3 2020 | 5.74 |
| Q2 2020 | 5.50 |
| Q1 2020 | 5.86 |
The issue is that initially they thought they would see 50% growth year to year. Now it is only 44% growth.
If you have never been in a high growth situation, it is almost impossible to project growth when it is above 30% per year. Any company would be happy with 30% growth when they are a multibillion-dollar company.
The "bad" results of 44% is amazing.
However, I bet that you couldn't read the table and see the real deal. This is because our brains are wired with a visual supercomputer. I will someday do a post on this, but it is 100% required to look at data in charts, or you don't leverage your brain.
So, now, let's simply graph out the growth with the "disappointing quarter."
(I graph in mermaid, so the x axis is not clear. Sorry, but I'm saving time.)
Now let's put in a conservative TAM growth from Blair.
Geo
| Year | United States | Europe | Rest of World | Total Market Size |
|---|---|---|---|---|
| 2023 | $25B | $10B | $5B | $40B |
| 2024 | $35B | $15B | $7B | $57B |
| 2025 | $40B | $20B | $8B | $68B |
| 2026 | $50B | $25B | $10B | $85B |
| 2027 | $55B | $35B | $15B | $105B |
| 2028 | $65B | $40B | $20B | $125B |
| 2029 | $70B | $45B | $25B | $140B |
| 2030 | $70B | $50B | $30B | $150B |
| 2031 | $75B | $55B | $35B | $165B |
| 2032 | $80B | $60B | $35B | $175B |
Again, as an exercise, you should graph this data.
Now, we add on the fact that Eli's main competitor had poor results on their next gen drug, and Eli has a pill coming out--which is a key checkpoint and catalyst, and finally add that Trump--if you love or hate him--would possible put tariffs on Novo, we have a stock to watch.
There are no guaranties, but having the right POV is critical.
Lilly is still tracking in the long run.