Does Merck’s 9% Rally Signal a Long-Term Value Opportunity for 2025?

Trying to decide what to do with Merck stock? You are definitely not alone. Investors all over are curious, especially after the stock’s recent moves. In just the last month, Merck bounced back up 9.0%, and over the past week alone it gained 4.2%. This is a pretty sharp turn, considering the stock is still down 11.7% year-to-date and about 14.6% over the past year. The longer horizon tells another story. Merck is up 41.3% if you look back five years, suggesting there is real staying power beneath the recent volatility.

Part of this renewed interest may be thanks to the company's developments in the immunology and oncology space. There has been ongoing buzz about their pipeline and partnerships, which are helping to shift perceptions around future growth. Investors are starting to reassess risk and opportunity, especially after news of regulatory progress for key therapies and collaborations with biotech innovators. Together, this context sets up an intriguing case for Merck’s value outlook.

To help untangle whether Merck’s recent momentum is justified, we took a close look at its valuation using six different checks. The company scores a 5 out of 6 for undervaluation, which definitely sets it apart from the pack. So how do these valuation approaches stack up and what do they really tell us? Let’s break down each method in turn, and stick around for what might be the most revealing angle of all at the end.

Why Merck is lagging behind its peers

Approach 1: Merck Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future cash flows and discounting them back to their present value. This approach helps investors understand what those future dollars are worth today, accounting for time and risk factors.

For Merck, the latest reported Free Cash Flow (FCF) stands at $14.5 billion. Analyst projections estimate Merck’s annual FCF will steadily rise, reaching approximately $23.2 billion by the end of 2029. While analysts provide data for the next five years, longer-term numbers are extrapolated to complete a full 10-year outlook. All figures are reported in US dollars.

Applying these projections using the DCF model, Merck's intrinsic value is calculated at $207.62 per share. This price is about 57.8% higher than the current trading level, indicating a substantial discount based on its expected cash flows.

The conclusion from this DCF analysis is clear. Merck shares are significantly undervalued when measured against their anticipated long-term earning power.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Merck.

Our Discounted Cash Flow (DCF) analysis suggests Merck is undervalued by 57.8%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Merck Price vs Earnings (PE)

For profitable companies like Merck, the price-to-earnings (PE) ratio is a widely used and meaningful valuation metric. It provides a simple way to assess how much investors are willing to pay for every dollar of the company’s earnings. A lower PE could suggest undervaluation, while a higher PE can reflect strong growth prospects or lower risk.

Growth expectations and risks play a big role in determining what counts as a “normal” or “fair” PE ratio. Companies with strong, consistent earnings growth or lower risk profiles often carry higher PE ratios. In contrast, firms facing uncertainty or slower growth typically see lower PE multiples.

Merck currently trades at a PE ratio of 13.3x, which is well below the Pharmaceuticals industry average of 18.4x and also lower than the peer average of 18.6x. At first glance, this might suggest the stock is attractively priced compared to its industry and competitors.

However, the “Fair Ratio” developed by Simply Wall St takes a more nuanced view. This metric considers Merck's own growth outlook, profit margins, market cap and specific risks, as well as typical industry multiples. It gives a tailored benchmark for Merck, which in this case is a fair PE ratio of 25.7x, rather than a one-size-fits-all average. Because the Fair Ratio factors in forward-looking growth drivers and company-specific details, it provides a more accurate picture of appropriate valuation than peer or industry comparisons alone.

Putting it all together, Merck’s current PE of 13.3x is much lower than its Fair Ratio of 25.7x. This outcome suggests that the stock looks significantly undervalued on this basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Merck Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a clear, personalized story you create around a company, linking your perspective on its business outlook with your own financial forecasts and fair value estimates. Instead of relying solely on ratios or analyst targets, you can develop your own view of Merck by combining the numbers (like projected earnings or margins) with the story you believe for its future.

Narratives connect the dots by tying together Merck's business developments, such as new product launches or strategic investments, with tailored financial forecasts and an estimated fair value. This enables you to see, step by step, why a company may be undervalued or overvalued for you personally, rather than just for "average" investors.

Simply Wall St makes building and sharing Narratives simple and accessible to everyone, directly on the Community page, so you can learn from millions of other investors and keep your view current. When new information emerges, like fresh earnings or industry news, Narratives are updated automatically, helping you decide if Merck is a buy or sell based on your fair value compared to today’s price.

For example, some investors see Merck’s future driven by its expanding drug pipeline and value it closer to $141 per share, while others focus on potential risks and arrive at a more cautious $82 fair value. With Narratives, both perspectives can coexist and adapt as new facts unfold.

Do you think there's more to the story for Merck? 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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