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Novo Nordisk (NYSE: NVO) is having a moment. The Danish pharmaceutical giant is a developer of diabetes and weight-loss treatments. If you aren’t familiar with the company by name, you almost certainly have seen commercials for its flagship medicines Ozempic, Wegovy, and Rybelsus.

The stock is up 40% year to date and after the company’s latest financial report, it looks like it could be headed even higher. Following the latest results, the company announced a 2-for-1 stock split set to occur Sept. 20. I’ll break down how stock splits work, and why I would recommend buying some shares before the split occurs.

What is a stock split?

Stock splits are an interesting feature of financial engineering. Let’s say that you own 10 shares in Novo Nordisk stock today. Given the company is doing a 2-for-1 split, you will have 20 shares after the split goes into effect.

While the number of shares that you own doubles, the intrinsic value of your position will not increase. The reason for this is because the overall outstanding share count has doubled, which in theory, causes the stock price to become half of what it was trading at before the split. Given these parameters, the market capitalization for the company remains unchanged. Or does it?

Generally speaking, the objective of a stock split is to increase liquidity in the market. With a new, lower price, a recently split stock may be more accessible to a larger number of prospective investors. For this reason, stocks often experience a bump-up following a split due to increased investor participation. Given this dynamic, it could be a good idea to buy a stock before it splits.

Image source: Getty Images.

How is the company performing?

Through June 30, Novo Nordisk increased total revenue by 29% year over year. While this is impressive, it’s where the company is seeing this growth that has me most excited.

The company’s obesity business grew 157% year over year through the first half of 2023. This trend was primarily driven by two treatments: Saxenda and Wegovy. In the United States alone, obesity care revenue was driven by Wegovy’s 344% annual gain. On top of Wegovy’s success, investors may be encouraged to learn that Novo Nordisk also holds over 50% of the global GLP-1 market, with Ozempic accounting for 45% alone.

It’s important for investors to understand that Novo Nordisk’s treatments are available around the world. While the company dominates Europe and is witnessing unprecedented demand in the U.S., Novo Nordisk is also aggressively penetrating markets across Asia, particularly in China. Given the company’s global reach and the popularity of various treatments, Novo Nordisk appears to be building a roadmap for long-term sustainable growth.

Should you buy the stock now?

When it comes to valuation, there are a number of metrics that can be analyzed to assess if a stock is trading at an attractive level. As I wrote just last week, Novo Nordisk and its primary competitor, Eli Lilly, trade at meaningful price-to-sales (P/S) premiums over other comparable drugmakers. The graph below illustrates the movement in Novo Nordisk’s P/S ratio throughout 2023. It is easy to see that the company has experienced more pronounced momentum in just the last few weeks.

NVO PS Ratio data by YCharts

When a stock has this level of momentum pushing it higher, investors should act with caution. My suspicion is that given the company’s success, Novo Nordisk is starting to become more well known among a larger number of investors. And as more investors pile into the stock, the price goes up and it becomes more expensive. Yet despite trading near highs, I believe Novo Nordisk is still a buy at these levels.

The company appears to have a solid operation in place as it pertains to the diabetes and weight-loss supplement markets. If you are an investor with a long-term mindset, you may want to start buying shares in this growth stock before the stock split later this month.

Although it’s possible that the stock will experience a short-lived surge, I personally would not sell and book a quick profit. I believe that increased competition will ultimately be a good thing for Novo Nordisk and that the upside potential in the long run is too good to pass up.

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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

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