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Is Illumina, Inc. a Buy in 2018?

By Keith Speights – Jan 18, 2018 at 2:32AM

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This gene-sequencing stock soared in 2017. But can its momentum continue in the new year?

After a mediocre performance in 2015 and a miserable 2016, Illumina, Inc. (ILMN -2.13%) stock sizzled last year. Thanks to a strong launch of its new NovaSeq gene-sequencing system, Illumina's share price soared nearly 71% in 2017.

But after the big gain, is Illumina still a buy in 2018? Here are the arguments why it is -- and why it isn't.

Dart slicing through DNA to hit dartboard

Image source: Getty Images.

The case for buying Illumina

We only have to look at Illumina CEO Francis de Souza's presentation at last week's J. P. Morgan Healthcare Conference to identify several top reasons to buy Illumina stock. First of all, there's NovaSeq. De Souza said that the launch of the powerful gene-sequencing system continues to top expectations. What's really great for Illumina is that sales growth from NovaSeq is expected to extend over several years, as existing customers convert to the system.

In addition to NovaSeq, Illumina now has another new gene-sequencing system on the market, iSeq. The desktop system has an entry-level price tag of less than $20,000. Illumina thinks that iSeq has the potential to attract around 35,000 customers who are new to next-generation sequencing.

The company also has significant growth potential in the customer genomics market. Increasingly more people across the world are interested in exploring their genetic makeup. That's not only good news for consumer genomics companies like Ancestry, 23andMe, and Helix, it's good news for Illumina, since all three companies use Illumina's microarrays.

Genomic sequencing is also becoming more important in clinical use. Personalized medicine is one of the key trends shaping the future of healthcare. Illumina's sequencing technology should be in greater demand as the use of personalized medicine increases.

Another reason to buy Illumina stock is that it buys a lottery ticket of sorts for yet another promising new technology -- liquid biopsies. Illumina formed GRAIL in 2016 to focus on developing a simple blood test to detect multiple types of cancer at an early stage. While Illumina now owns less than 20% of GRAIL, if the spin-off company is successful, it would be a huge boost for Illumina stock.

The case against Illumina

I think it's hard to argue against the potential for genomic sequencing to become more important in the future. However, there is a case to be made that Illumina stock's price already factors in a lot of that growth.

Illumina currently trades at nearly 54 times expected earnings. That's a steep valuation compared to most stocks on the market. Don't think factoring in projected growth helps make the stock look more attractive. Illumina's price-to-earnings-to-growth (PEG) ratio stands at a super-high 4.41.

There's also the possibility that Illumina's innovation could ultimately be its downfall. When the company launched NovaSeq, it stated that the technology platform could one day usher in a $100 genome. Cheaper genomic sequencing would no doubt create much higher demand. However, that could backfire on Illumina if the added demand doesn't compensate for the lower prices. 

And what about competition? Illumina certainly commands a dominating position in the gene-sequencing market right now. However, there are other companies nipping at its heels, including Pacific Biosciences of California, Roche, and Thermo Fisher Scientific.

The rival that I'd watch the closest, though, is BGI. China should continue to be a big driver of growth in the gene-sequencing market. Since BGI is based in Shenzhen, China, with offices in other large Chinese cities, the company could edge out Illumina over the long run in capturing market share in China. 

Is it a buy?

In my view, Illumina should continue to enjoy strong growth because of the factors mentioned in the case for buying the stock. Whether or not to buy Illumina comes down to the answers to two questions: (1) Is the stock too expensive; and (2) How strong is Illumina's moat?

My answer to the first question is that Illumina really isn't any more expensive than it has been in the past. In fact, the stock trades at a lower earnings multiple than it has for much of its history. 

As for the strength of Illumina's moat, I would also point to the company's track record. Even in the face of multiple competitors, Illumina has maintained its leadership position in the gene-sequencing market through the years. NovaSeq and iSeq are good examples of how the company continues to innovate. With Illumina investing 25% of its total revenue in research and development in 2017, I expect the company's moat to remain strong.

I wouldn't count on Illumina chalking up another 71% gain in 2018. However, my opinion is that this stock should continue to be a great pick over the long run.

Keith Speights owns shares of JPMorgan Chase. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy.

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