The go-to stock for genomics just keeps going. It's likely that a fair number of the institutions that love Illumina (Nasdaq:ILMN) would stammer to explain exactly what their machines do, but they certainly know the stock is doing well.

TUTORIAL: Top Stock-Picking Strategies

Another Strong Quarter in the Books
Snarkiness aside, Illumina continues to deliver the sort of high-growth/low-competition story that growth investors dream about and so rarely find. Revenue rose another 47% this quarter, with sequencing sales leading the way at nearly 90% growth and sequencing consumables revenue growing about 70%. Arrays were weaker at 12% growth, but expectations were modest here anyway.

What may surprise some investors is how small Illumina still is. While this is clearly a legitimate growth stock star, the company booked about $283 million in revenue this quarter - on par with F5 (Nasdaq:FFIV) (another growth darling), but far smaller than software companies like VMware (NYSE:VMW) or Salesforce.com (NYSE:CRM). Even within its own home market of life sciences, Illumina looks somewhat small when compared to names like Life Technologies (Nasdaq:LIFE), Waters (NYSE:WAT) or Thermo Fisher (NYSE:TMO). (For more, see A Fistful Of Life Sciences.)

In any case, profitability continues to improve, albeit not evenly. Gross margin actually fell about two points relatively to last year, but Illumina should be largely past its trade-in period, and ASPs for machines like the HiSeq should start to really improve. Operating income continues to grow nicely whether one uses the GAAP numbers (up 82%) or the non-GAAP (up 72%).

Illumina Is a Winner, But More Battles Loom
There is no question that Illumina is a force in sequencing and arrays. The question is whether the company can maintain that momentum. While the company has marginalized Affymetrix (Nasdaq:AFFX) in arrays, the acquisition of Ion Torrent has rejuvenated Life Technologies. This is particularly true in the "desktop" sequencing market - an emerging market that is still more theoretical than real, but nevertheless holds a lot of promise.

Longer term, there is even more competition on the horizon. Pacific Biosciences (Nasdaq:PACB) has built a lot of anticipation for its new products, while General Electric (NYSE:GE) and IBM (NYSE:IBM) continue to tease with what they may or may not have to offer the market in a few years. Keep in mind that each instrument sale can mean as much as $700,000 or more per year per instrument in consumables sales, so holding shares in instruments is critically important.

While there is talk of more spending on genomics in markets like pharmaceuticals, food safety and agriculture, it's been going on for quite a while now. The reality is that the biggest opportunities for companies like Illumina remain in academic labs and research hospitals where government funding is a major factor. The National Institute of Health's budget has not suffered as badly as some feared and genetic analysis is still a priority, but this could be a year-to-year risk for some time to come.

The Bottom Line
Illumina is past the point where reasonable discounted cash flow produces a viable fair valuation. So long as the growth continues, investors won't care. In the meantime, investors should also give some thought to names like Life Technologies, Waters and Thermo Fisher - none of these companies have the growth prospects of Illumina, but they have more diversified businesses and more reasonable valuations. By all means consider Illumina on the pullbacks, but keep in mind that the "easy" markets are more than half-penetrated and future growth may be more difficult or erratic than the optimists expect. (For more, see Time For A Diagnostics Test.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  4. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  5. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  9. Personal Finance

    Protect Your Home From Medicaid Liens

    Plan ahead for long-term care needs to protect your home and your estate.
  10. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!