Merck stock analysis: great pipeline at a stretched valuation

Merck's stock has hit an all-time high of $153.53, marking a 78% increase over the past year, primarily driven by a positive Phase 3 readout for an mRNA cancer therapy developed jointly with Moderna. However, the stock is presently trading 7.5% above its fair value estimate, with a daily RSI of 78.4, indicating an overbought condition.

The main catalyst behind the rally is the INTerpath-001 Phase 3 trial for Merck and Moderna's innovative mRNA melanoma treatment, the first of its kind to achieve positive Phase 3 results. Goldman Sachs has raised its price target to $160 from $140, maintaining a Buy rating, while UBS has downgraded the stock to Neutral at $150, citing the recent surge.

Merck's growth trajectory has been impressive, with revenue rising from $48.7 billion in 2021 to $65.0 billion in 2025, and EPS increasing from $5.14 to $7.28 over the same period. The company's ROE stands at 36.9%, and its beta is 0.21, indicating low volatility. However, the looming patent cliff of Merck's blockbuster drug Keytruda, set to expire in 2029, poses a significant challenge, as generic competition will erode a substantial portion of its revenue.

Despite the optimism surrounding the groundbreaking mRNA platform and the pipeline's potential, the current valuation is high, and investors may want to wait for a pullback or further pipeline readouts to de-risk the investment.