Why Illumina Cratered by 24% Last Week

DNA sequencing specialist Illumina (ILMN 0.63%) saw a dramatic stock price drop last week after it released a preliminary report anticipating lower-than-expected revenue growth for Q1.

In this segment from the MarketFoolery podcast, Chris Hill, Charly Travers, and Jim Mueller explain what caused the dip in Illumina's (still double-digit) growth, how the company is performing in general, and why the market had such a violent reaction to the report.

A transcript follows the video.

This podcast was recorded on April 19, 2016. 

Chris Hill: Let's move on to Illumina, which is having a pretty rough day. Shares down 24% after the biotech company reported preliminary first-quarter revenue, which was way below what was initially projected. Charly, I think it was just this past weekend on the radio show, we were talking about how anytime a company comes out with preliminary results, they're always bad.

Travers: Yeah. (laughs) 

Hill: It's never "This quarter will be so great, we can't wait to tell you about it!"

Mueller: "Guys, I have to tell you something, we really killed it!"

Hill: So, from the stock perspective, it's down 24%. How bad is this? And, as Jim indicated about Netflix, what we're seeing play out there, shares down 10%, may be a buying opportunity for people -- is what's playing out with Illumina potentially a buying opportunity?

Travers: So, Illumina is the industry leader in selling DNA sequencing machines and the consumables that go along with it. So, they're widely used by research institutions, universities, and the like. And that's transitioning quickly into medical applications as well to do personalized medicine. So, they're going to do $572 million sales in Q1, which will be 6% growth. And they pulled down their full-year guidance for the year. Originally, they thought they'd grow revenue 16%, and that's going to come in at 12%.

The problem there is, system sales into Europe are a lot weaker than they thought they were going to be. America and Asia are doing fine, mid-teens growth for them. But it can be low single digit in Europe, and they're making some management changes as part of that. And along with lower unit volume, their profit margins are going to come down as well. I think there's a lot of companies out there that wish their problem was 12% sales growth this year. So, let's just put that in some context.

Hill: (laughs) I mean, no question. On a percentage basis, that's a haircut, but it's still double-digit growth!

Travers: It is. And I think the issue is, they're almost a victim of their own success in this regard. This is a company that's grown their sales 20-25% a year for a very long time. And now that that's coming down back to a little bit more normal numbers versus spectacular numbers, I think you're seeing a little bit of a resetting on the valuation. The stock has just chronically traded at 70-80 times earnings year in and year out. But you have to deliver the revenue growth to maintain that kind of earnings multiple, and there's just a little bit of a reset going on.

Hill: Well, and that ties in with one of the things I read this morning about Netflix, and it has to do with expectations, and the fact that Netflix is now one of those businesses that has performed so well for so long that fairly or unfairly, expectations are higher for them. And that's what you get for delivering solid performance quarter in, quarter out. All right, so, you look at this, and you think, maybe a buying opportunity?

Travers: I think, when they do their Q1 call in May, I'd like to hear more about exactly what is going on in Europe, and the personnel they're bringing in there, and what their game plan might be.