Necrotizing enterocolitis (NEC) is a significant cause of morbidity and mortality in the neonatal population. Formula feeding is among the many risk factors for developing the condition, a practice often required in the cohort most often afflicted with NEC, preterm infants. While the virtues of many bioactive components of breast milk have been extolled, the ability to digest and assimilate the nutritional components of breast milk is often overlooked. The structure of formula differs from that of breast milk, both in lipid composition and chemical configuration. In addition, formula lacks a critical digestive enzyme produced by the mammary gland, bile salt-stimulated lipase (BSSL). The gastrointestinal system of premature infants is often incapable of secreting sufficient pancreatic enzymes for fat digestion, and pasteurization of donor milk (DM) has been shown to inactivate BSSL, among other important compounds. Incompletely digested lipids may oxidize and accumulate in the distal gut. These lipid fragments are thought to induce intestinal inflammation in the neonate, potentially hastening the development of diseases such as NEC. In this review, differences in breast milk, pasteurized DM, and formula lipids are highlighted, with a focus on the ability of those lipids to be digested and subsequently absorbed by neonates, especially those born prematurely and at risk for NEC.