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. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  8. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  9. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  10. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center