Royalty Pharma has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 31.5% and now trades at $45.91. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Royalty Pharma, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Royalty Pharma Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Royalty Pharma for now. Here are two reasons there are better opportunities than RPRX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Royalty Pharma’s 2.3% annualized revenue growth over the last five years was tepid. This fell short of our benchmarks.
2. Fewer Distribution Channels than Larger Competitors
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $2.38 billion in revenue over the past 12 months, Royalty Pharma lacks scale in an industry where it matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
Final Judgment
Royalty Pharma isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 8.7× forward P/E (or $45.91 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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