The stock of Illumina (NAS:ILMN, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $403.885 per share and the market cap of $59 billion, Illumina stock is believed to be modestly overvalued. GF Value for Illumina is shown in the chart below.
Because Illumina is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 5.6% over the past three years and is estimated to grow 9.41% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Illumina has a cash-to-debt ratio of 1.82, which is in the middle range of the companies in the industry of Medical Diagnostics & Research. GuruFocus ranks the overall financial strength of Illumina at 7 out of 10, which indicates that the financial strength of Illumina is fair. This is the debt and cash of Illumina over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Illumina has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.2 billion and earnings of $4.45 a share. Its operating margin is 17.91%, which ranks better than 75% of the companies in the industry of Medical Diagnostics & Research. Overall, the profitability of Illumina is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Illumina over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Illumina's 3-year average revenue growth rate is in the middle range of the companies in the industry of Medical Diagnostics & Research. Illumina's 3-year average EBITDA growth rate is -4%, which ranks worse than 74% of the companies in the industry of Medical Diagnostics & Research.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Illumina's return on invested capital is 11.57, and its cost of capital is 6.88. The historical ROIC vs WACC comparison of Illumina is shown below:
In short, the stock of Illumina (NAS:ILMN, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 74% of the companies in the industry of Medical Diagnostics & Research. To learn more about Illumina stock, you can check out its 30-year Financials here.
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