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.

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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.)

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