How Does Gilead's Valuation Stack Up After CVS Excludes New HIV Shot from Coverage?

If you are staring at Gilead Sciences and wondering whether it is time to buy, hold, or sell, you are not alone. The stock has delivered a solid ride lately, with a 25% year-to-date gain and a 54% total return over the past year. Even with some short-term volatility, including a dip over the last week, the longer-term chart looks encouraging for those seeking exposure to biotech leaders.

A closer look at recent headlines reveals some of the intricacies underlying these moves. News that CVS Health declined to add Gilead's new HIV prevention shot Yeztugo to key drug coverage lists initially sparked some uncertainty and pressured shares momentarily. However, confident outlooks from analysts, who suggest broader access may soon be mandated, helped restore optimism and reminded investors that regulatory shifts can quickly change the narrative in biotech.

Of course, it is not just about reacting to the news cycle. When you peel back the layers, Gilead’s valuation becomes especially interesting. Based on six key checks used to assess undervaluation, Gilead scores a 4 out of 6, which makes it look attractively priced compared to many peers. That brings us to the big question: is Gilead truly undervalued, or is there more to the story?

Let’s dive into the numbers and the methods behind these valuation scores to see how traditional approaches stack up. This way, investors can consider what might be an even smarter approach to evaluating whether Gilead is a fit for their portfolios.

Gilead Sciences delivered 54.4% returns over the last year. See how this stacks up to the rest of the Biotechs industry.

Approach 1: Gilead Sciences Cash Flows

The Discounted Cash Flow (DCF) model works by forecasting a company’s future cash flows and then discounting them back to today’s value, aiming to estimate what Gilead Sciences is truly worth based on its expected ability to generate cash.

For Gilead Sciences, the latest twelve months' Free Cash Flow stands at approximately $9.3 billion. Projections show this number rising steadily, with analysts estimating cash flows could reach roughly $18.2 billion in ten years. Each year’s projection is discounted to account for risk and the time value of money, painting a realistic picture of future earning power.

Pushing the numbers through this two-stage DCF model, Gilead’s intrinsic fair value is calculated at $289.90 per share. Compared to the current trading price, this suggests the stock is 60.4% undervalued. This indicates a significant gap between what the market is paying and what the business may be truly worth.

This model suggests there is a compelling margin for long-term investors looking for value in biotech leaders.

Result: UNDERVALUED

Our DCF analysis suggests Gilead Sciences is undervalued by 60.4%. Track this in your watchlist or portfolio, or discover more undervalued stocks based on DCF analysis.

Approach 2: Gilead Sciences Price vs Earnings

The Price-to-Earnings (PE) ratio is a well-established and popular metric for valuing profitable companies like Gilead Sciences. It provides a straightforward way to measure how much investors are willing to pay today for each dollar of earnings, which can help indicate if a stock is fairly valued compared to its profits.

It is important to note that what constitutes a “normal” or “fair” PE ratio often depends on a company’s growth prospects and risk profile. Higher expected growth or lower risk typically supports a higher PE multiple, while more uncertainty or slower growth can justify a lower one.

Gilead’s current PE ratio stands at 22.6x. In comparison, this is above the average for the Biotechs industry, where the typical PE is 15.1x, but below the peer average of 41.3x. Simply Wall St’s Fair Ratio calculation, which takes into account specific elements like Gilead’s earnings growth, margins, industry position, market cap, and risk, is 27.3x. With the actual PE ratio at 22.6x and the fair ratio at 27.3x, Gilead trades well below what would be expected for its profile, suggesting the stock could be undervalued on this basis.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Gilead Sciences Narrative

Instead of relying solely on numbers, investors can now use Narratives: a simple yet powerful way to express their view of a company's future by telling the "story" behind the forecasts and estimates that drive a fair value.

A Narrative connects what you believe about Gilead Sciences, such as expected revenue growth, future earnings, margins, and risks, to a tangible financial forecast and a calculated fair value. This process links the company’s story directly to investment decisions.

On the Simply Wall St platform, Narratives make this process easy and accessible by offering ready-made storylines from a global community, so you can see how millions of real investors interpret the same data from different perspectives.

Narratives help you decide whether to buy or sell by comparing the Fair Value (based on your or others' forecasts) to today’s share price. This allows you to act confidently when there is a compelling gap between value and price.

Narratives update dynamically as new earnings releases or news are published, ensuring that your view of Gilead remains accurate and actionable at all times.

For example, one investor uploading a Narrative might see Gilead’s fair value as high as $140, expecting strong product launches and global healthcare trends, while another sees it only at $91, focusing more on competitive and pricing risks.

Do you think there's more to the story for Gilead Sciences? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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