Illumina (NASDAQ:ILMN) enjoyed a tremendous year in 2017, with its share price soaring more than 70%. The launch of the gene-sequencing pioneer's new NovaSeq system was a huge success.
That success has continued into 2018, with Illumina recently touching yet another all-time high share price. But is Illumina stock one to buy, sell, or hold after its huge gains? Let's look at the key arguments for each alternative.
The best reason for buying Illumina stock is that it should generate market-beating returns over the long run. That's certainly been the case in the past. Over the last 10 years, Illumina has chalked up gains nearly six times higher than the S&P 500. Since Illumina's initial public offering in 2000, the stock has soared 1,180% while the S&P 500 rose 92% during the same period.
Can Illumina continue to outperform the market? There's a strong case to be made that it can.
Most of Illumina's customers currently using its HiSeq high-throughput sequencing systems have yet to transition to the company's new NovaSeq system. This should mean higher systems sales are in store for Illumina over the next few years.
The company plans to soon launch its new iSeq system with a price tag of less than $20,000. This low-cost system could attract a large number of new customers. Illumina CEO Francis de Souza said earlier this year that the company estimates that there are more than 50,000 potential customers for iSeq, including 35,000 who are new to next-generation sequencing.
With the tremendous potential for precision medicine, demand for gene-sequencing technology should continue to grow. Illumina continues to expand the market by lowering the cost of gene sequencing. More powerful systems combined with lower costs should enable Illumina to remain at the forefront of the industry -- and drive the stock higher in the future.
Why sell Illumina stock? Perhaps the best argument is that expectations of growth are already baked into the stock price, setting Illumina up for a fall if any problems arise.
There's no question that Illumina commands a premium valuation. Shares currently trade at a whopping 47 times expected earnings. Only six other stocks with market caps as big as Illumina are priced at that kind of level.
And there's no shortage of problems that could crop up. Proposed tariffs could conceivably lead to an escalating trade war that would pull many stocks down. Illumina could experience lumpiness in quarterly revenue and earnings that causes the company to miss Wall Street estimates.
Illumina is the leader in gene sequencing, but it isn't the only company in the space. Competitors could take market share away from the company over the next few years.
It's also possible that Illumina could shoot itself in the foot. The company has stated that the NovaSeq technology could lead to the $100 genome -- roughly one-tenth of the current cost for genome mapping. An expanding market has generated higher revenue for Illumina so far despite prices coming down. However, Illumina could run into challenges if growing demand doesn't compensate for the lower prices in the future.
For investors who already own Illumina stock, sitting back and waiting could be the best approach. Most of the reasons for selling Illumina are speculative. However, the stock is definitely priced on the high end.
There is no shortage of other stocks to buy that could offer just as much growth potential as Illumina does but at a more reasonable price. Holding on to Illumina and buying shares of other promising companies could offer investors a path to generating the greatest returns.
In my view, the weakest of these three arguments is to sell Illumina stock. If you're going to sell a stock because problems might arise, you don't need to own stocks in the first place. Problems can always happen -- for any stock. As for the specific problems mentioned that Illumina could face, I'm not too worried about them right now.
The case for holding Illumina only applies to investors who have already bought the stock in the past. That leaves buying Illumina stock as the strongest argument for most investors.
But what about the argument that there are other stocks with greater growth potential and a better price than Illumina? I think that's definitely something to consider. This position, though, doesn't mean that Illumina isn't a good stock to own in a broader portfolio.
While Illumina's share price is expensive, the reality is that the stock has always been expensive. I've found that stocks that consistently claim high valuation multiples do so because they're in growing industries and have strong moats. Both of these criteria apply to Illumina.
I listened to Illumina CFO Sam Samad speak last week at the Cowen healthcare conference. His remarks highlighted three things about Illumina that are especially noteworthy: the company's long-term perspective, its focus on customers, and Illumina's commitment to innovation. My take is that these characteristics give Illumina a good shot at continuing to beat the market over the long run. Illumina remains a buy in my book.