Could shares of Vertex Pharmaceuticals help you retire a millionaire?
Vertex Pharmaceuticals (VRTX -3.16%) is a rapidly growing healthcare company that provides products that help treat patients with cystic fibrosis (CF). It also goes beyond that and into other areas to diversify its business. With several drugs in its portfolio and other approvals that may be in the pipeline, the stock has great growth potential.
It’s no wonder Vertex beat the markets this year. Its shares are up 27% while the S&P500 decreased by 16%. There’s no doubt that Vertex has a bright future ahead of it, but can it deliver the kind of returns you need to become a retired millionaire?
What type of return do you need to reach $1 million?
If you’re saving for retirement, several factors will determine whether you can reach $1 million: how many years of investment you have left, how much you’re investing today, and what your average growth rate will be.
To simplify things, I’ll assume that you have at least 20 to 30 years left before you retire. And ideally, you have at least $25,000 that you can invest for the long term. If you don’t have that much, it may be better to save until you reach at least that threshold.
Although the stock market is a great way to build wealth, you still need money to make money. Turning a $5,000 investment into $1 million would mean you had to make extremely favorable assumptions about the growth rate (for example, that your investment grows at a 20% rate for almost 30 years).
By accumulating savings and having more to invest, you can make it more likely that you will end up with $1 million in retirement without counting on a high growth rate. Here’s a look at how the rate of growth can lead to vastly different portfolio values over a 30-year period for a $25,000 investment:
Based on the chart above, a good growth rate to target is around 13%, so by year 30 your $25,000 investment will be worth around $1 million.
Can Vertex help generate this kind of growth?
Over the past five years, shares of Vertex have risen 83% (better than S&P 500 returns of 63%). This averages out to a compound annual growth rate of almost exactly 13%. If the company can continue to grow at this rate for decades, it could be a million dollar investment – based on the assumptions mentioned earlier.
The reason this may be possible is because Vertex keeps growing. This year, it forecast product revenue between $8.6 billion and $8.8 billion. Midway through, this represents a growth rate of more than 14% from the $7.6 billion in product revenue Vertex reported in 2021.
That may not be the kind of growth rate investors expect from a stock that can deliver above-market returns for decades. But what makes Vertex promising is that the company is expanding its core business and diversifying. It has a pipeline that includes promising products, including VX-147, which is in phase 3 trials to treat kidney disease. VX-548 is in phase 2 trials for the treatment of pain.
The company also works with CRISPR therapeutics on a gene-editing therapy, CTX001, to treat rare blood disorders, which could generate billions in revenue. It’s in phase 3 trials and the companies plan to file for regulatory approval by the end of this year.
Vertex is pursuing these growth opportunities while generating strong financials along the way. Net income of $3.2 billion over the past 12 months was an impressive 38% of revenue. It also racked up $3.8 billion in free cash flow during that time.
The company’s strong financials put it in an excellent position to fund its own growth without having to dilute investors like risky biotech stocks might. While its short-term growth rate might not look so impressive, in the long term Vertex’s numbers might look a lot stronger.
Should you buy shares of Vertex Pharmaceuticals?
Vertex shares trade at 23 times earnings. This is slightly more than the multiple of 20 at which the average healthcare stock is trading today. However, given the growth potential of the business, a premium is warranted.
Even though the stock has gone up in value over the years, it’s still not too late to invest in Vertex. The company has everything you would expect from a growth investment: a solid pipeline and finances to support its growth.
Of course, no stock can do all the work alone. Investors always want to have a diversified portfolio. But Vertex could potentially help you become a retirement millionaire, provided you invest at least $25,000 in Vertex and other similar promising companies that are expected to outperform the market in the long run.