The stock traded well above $300 before the recent downturn. It has a price-earnings ratio of nearly 70 and a lofty valuation of more than $45 billion. Its price has tripled in the past five years and is up more than 50% from its 52-week low, owing in part to renewed enthusiasm for the biotechnology industry. Does it warrant a look, or even your investment dollars?
It does if it’s Illumina Inc. (ILMN, Financial). The San Diego-based gene sequencing company is an American success story. Only 30 years old, it pretty much owned the gene sequencing market when it recently added Pacific Biosciences (PACB, Financial) to its portfolio for $8 a share in a $1.2 billion transaction.
The acquisition of Pacific complements Illumina's sequencing solutions with accurate long-read sequencing capabilities to answer a set of complex genomic questions. Illumina technology specializes in the bulk of the market, short-read sequencing. The deal is expected to close in the middle of 2019.
Illumina is in an enviable position. It has a dominant share in a rapidly growing market thanks to the lower cost of sequencing led in great part by Illumina. In this case, lower costs mean greatly expanded use.
The Global DNA Sequencing market is anticipated to grow from nearly $8 billion in 2017 to $34 billion by 2026, according to Inkwood Research. This is a compound growth rate of nearly 18%
In a recent interview in The Wall Street Transcript, David Westerberg, president and senior equity analyst at C.L. King & Associates, said he favors companies that have good business models like Illumina.
“These companies consistently execute, they have very high market share, they are in very defensible markets and they have very good continuing revenue streams,” he explained. “When you are looking at Illumina it has 80 percent to 90 percent market share, but its market backdrop is outstanding, and genomics itself is multi-decade.”
Illumina demonstrated its ability to continue executing when it reported third-quarter results in late October.
Revenue was $853 million, a 20% increase for the same period a year earlier. GAAP net income attributable to Illumina stockholders for the quarter of $199 million, or $1.33 per diluted share, compared to $163 million, or $1.11 per diluted share, for the third quarter of 2017.
For fiscal 2018, the company projects revenue growth of approximately 20%. The company now expects fiscal 2018 GAAP earnings per diluted share attributable to Illumina stockholders of $5.32 to $5.37 and non-GAAP earnings per diluted share attributable to Illumina stockholders of $5.70 to $5.75.
Not everyone is so bullish on the company. One analyst is nervous about Illumina's skyrocketing price and the threat of competition coming from new technologies, according to a July article in the San Diego Union-Tribune.
In a July 16 report, Morningstar analyst Michael Waterhouse rated Illumina as “significantly overvalued,” with a fair value of $205 per share.
Waterhouse describes Illumina as a well-run company with a growing product line in a surging market. His concern is that Illumina’s stock price has soared so high that it is vulnerable if it fails to meet the innumerable challenges in the DNA sequencing market, which is still emerging.
Much of that competition of is likely to come from the other top companies in the field. A number of them are private, but the leading public companies include:
- Macrogenics Inc. (MGNX, Financial)
- Agilent Technologies Inc. (A, Financial)
- Thermo Fisher Scientific (TMO, Financial)
Amgen (AMGN, Financial) clearly wants to get into the game. The company recently announced an investment in privately held Oxford Nanopore, which focuses on long-read sequencing.
Disclosure: The author holds positions in ILMN and AMGN.
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