When historians write in the future about the most influential companies of our era, Illumina (NASDAQ:ILMN) should make the list. The biotech revolutionized gene sequencing -- and continues to do so. It's not surprising that Illumina stock has rewarded investors tremendously.

Company Illumina
Initial Public Offering (IPO) July 28, 2000
Gain Since IPO  1,080% 
Market Cap  $34 billion

Data source: Yahoo! Finance, YCharts. Data as of April 25, 2018. 

Why has Illumina been so successful through the years? And is the stock still a smart buy for investors? Answering those questions requires understanding the company's business, its history, and its strategy for the future. Here's a complete analysis that tells you all you need to know about the gene-sequencing pioneer.

Man holding out hand, with virtual DNA helix hovering over his palm

Image source: Getty Images.

What is gene sequencing?

Illumina focuses on one thing: gene sequencing. But what does gene sequencing really mean? 

Let's start with the basics of human genetics. Every cell in your body normally contains 23 pairs of chromosomes. These chromosomes are made up of strands of deoxyribonucleic acid (DNA). DNA is broken into segments called genes. These genes serve as the blueprint for how the human body is built and how it functions.

DNA itself is structured as a double helix, which looks somewhat like a twisted ladder. Each step on the ladder is made of a pair of chemical bases. There are four kinds of chemical bases: adenine (A), guanine (G), cytosine (C), and thymine (T). A human gene can contain between several hundred to over 2 million of these DNA base pairs.  

So what is gene sequencing? It's determining the order of those DNA base pairs.

History of gene sequencing

The capability to sequence DNA dates back to the 1970s. Scientists used different colored fluorescent dye to link to each of the four chemical bases in DNA. In the 1980s, use of capillary electrophoresis (a technique used to separate DNA molecules by size) became a cornerstone of gene sequencing. This process was automated in the 1980s.

In 1987, the U.S. Department of Energy (DOE) established a genome mapping project as part of its desire to the effects of radiation on genetic mutations. The following year, Congress funded a joint effort between the DOE and the National Institutes of Health (NIH) to explore the human genome. This effort became known as the Human Genome Project.

Research continued throughout the 1990s. By 2000, the Human Genome Project had sequenced roughly 90% of the 3 billion base pairs in the human genome. Three years later, that percentage climbed to 99%. The project ended up costing around $2.7 billion in 1991 U.S. dollars.

Next-generation sequencing (NGS) came along in 2005. The process is somewhat similar to the capillary electrophoresis technique, but NGS uses a divide-and-conquer approach where instead of sequencing only a single DNA fragment, millions of fragments are sequenced is a massively parallel manner. As you might expect, NGS is much quicker than older types of gene sequencing. It's also a lot cheaper, with mapping a human genome now costing around $1,000.

Major stages in Illumina stock history 

Illumina has gone through eight distinct major stages since its IPO in 2000. The stock's performance reflects these stages.

1. Dot-com bubble aftermath (2000-2002)

While Illumina was founded in 1998, the company waited a couple of years to list its stock on the Nasdaq stock exchange. Illumina stock became available to investors only a few months before the dot-com bubble burst, dragging down nearly every tech stock in the process.

ILMN Chart

ILMN data by YCharts.

Over the next two and half years, Illumina lost more than 90% of its market cap. During this period, the company's revenue primarily stemmed from National Institute of Health grants, SNP (single nucleotide polymorphisms) genotyping services (which measure genetic variations between individuals), and the sale of custom oligonucleotides (synthetic DNA and RNA strands).  

Illumina's annual revenue was barely over $10 million at its peak during this period, with government grants generating nearly all of its total revenue in 2000 but decreasing to 26% by 2002. But the company continued to post huge losses. 

Near the end of this period, though, Illumina launched its first system for labs to conduct their own SNP genotyping. The commercialization of this product paved the way for Illumina's later success, because it was Illumina's first product to be sold instead of providing only services to customers.

2. Comeback story (2003-2008)

Illumina's Beadlab genotyping system was an immediate hit with its capability to produce up to 1.4 million genotypes per day. . In 2003, the company's revenue nearly tripled from the prior year to $28 million. Most of the increase came from sales of the new Beadlab system Illumina stock made a huge comeback, gaining a whopping 2,670% between Jan. 1, 2003 and Jul. 31, 2008.

ILMN Chart

ILMN data by YCharts.

Introduction of new products, especially BeadStation genotyping systems, helped Illumina's revenue grow rapidly -- from $28 million in 2003 to nearly $367 million in 2008. Illumina also began to enjoy strong consumables sales of chemical reagents (chemicals used to react with DNA in the gene-sequencing process) for its systems, foreshadowing the significant contribution consumables would have on total revenue in the future. The company also reached a major milestone in 2006, posting a profit for the first time in its history. 

In January 2007, Illumina completed the acquisition of Solexa, which focused on whole-genome sequencing -- the mapping of a complete genome of an organism at a single time. Scientists were already realizing the benefits that whole-genome sequencing offered, including identifying DNA variants that might otherwise be missed and generating large amounts of data in a short period of time.

The Solexa acquisition positioned Illumina to be the leader in this promising area of gene sequencing. Although costs related to the deal caused Illumina to report a net loss in 2007, the short-term pain produced a long-term gain. The combination of the two companies created the gene-sequencing juggernaut that Illumina is today. 

3. Economic crisis (2008-2009)

Few stocks fared well during the economic crisis that struck in the second half of 2008. Illumina was no exception. By early December 2008, Illumina had lost nearly 60% of its market cap.

ILMN Chart

ILMN data by YCharts.

Illumina yet again rebounded, however. Despite the turbulent times, the company's revenue continued to grow strongly  -- jumping 16% from 2008 to 2009 in large part due to the sales of Genome Analyzer gene-sequencing systems gained through the Solexa acquisition. In the midst of the global economic crisis, Illumina posted its highest top- and bottom-line results ever, with revenue of $666 million and earnings of $72 million in 2009

4. HiSeq highs (2010-2011)

Another milestone for Illumina came in 2010, when the company began shipping its HiSeq 2000 high-throughput gene-sequencing system, which was able to sequence DNA faster than any previous technology. With HiSeq 2000, the cost of mapping a human genome fell below $10,000 for the first time ever. The system took Illumina three years to develop, but the effort definitely paid off. Over the next year and a half, Illumina stock soared 145%.

ILMN Chart

ILMN data by YCharts.

HiSeq 2000 provided a win-win scenario for both Illumina and its customers. The new system ultimately became more profitable for Illumina than the older Genome Analyzer systems. HiSeq 2000 also dramatically lowered consumable costs for customers.

5. A time of uncertainty (2011-2012)

Those HiSeq highs didn't last very long, however. Illumina entered a period of uncertainty on two different fronts. Its stock performance during this time reflected those uncertainties.

ILMN Chart

ILMN data by YCharts.

In the U.S. and in Europe, governments focused on reducing fiscal deficits by controlling spending. This negatively impacted government and academic research funding, a major source of revenue for Illumina. 

Also, in January 2012, Roche made a hostile takeover attempt of Illumina. By April, Illumina had successfully fended off Roche's attempted acquisition. But the episode contributed to a general air of uneasiness for the company.    

6. A multiyear boom (2013-2015)

Illumina transitioned to another boom period beginning in 2013. The stock tripled in value between January 2013 and mid-2015.

ILMN Chart

ILMN data by YCharts.

Part of Illumina's success during this period stemmed from the launch in early 2014 of two new systems. HiSeq X Ten enabled customers to sequence a human genome for $1,000. This was a tremendous achievement considering the cost of mapping a human genome in 2009 was $200,000. Illumina's other new system, NextSeq, brought the power of high-throughput gene sequencing to a benchtop system. This opened up more complex gene sequencing to smaller organizations, which expanded the market for Illumina.  

7. Floundering (2015-2016)

The bloom on the rose faded for Illumina in the second half of 2015. Illumina provided disappointing guidance for 2015 Q4, due primarily to sluggish sales in Europe and the Asia-Pacific region.

ILMN Chart

ILMN data by YCharts.

Troubles continued into 2016. Illumina appeared to be floundering, as management repeatedly missed both Wall Street estimates and its own forecasts. Part of the problem was that the U.S. government changed its funding practices. This resulted in academic and government customers delaying purchases while funding was up in the air. In addition, customers' migration from older systems to NextSeq temporarily impacted consumables sales.

8. NovaSeq resurgence (2017-present)

Previous launches of BeadLab and HiSeq helped spark good times for Illumina. In 2017, the company's introduction of a new product did it again. This time around, the product was NovaSeq -- and the new system represented a significant leap forward for gene-sequencing technology. NovaSeq currently stands as the most powerful gene-sequencing system introduced by Illumina with more flexibility and scalability than previous systems.

ILMN Chart

ILMN data by YCharts.

NovaSeq attracted rave reviews from customers. It also expanded Illumina's market, with around one-third of orders for the system coming from customers that had not previously been Illumina customers or were users of the company's lower-throughput bench-top systems. As a result of NovaSeq's successful launch, 2017 became a year to remember for Illumina, with the stock's gain of 71% the best performance since 2013.

Strategy for the future

How does Illumina plan to keep its momentum going over the long run? In a nutshell, the company intends to expand the market by offering systems that reduce the cost of gene sequencing. This, in turn, will create more recurring revenue for Illumina with consumable sales.

There are two growth markets Illumina is targeting. At the J.P. Morgan Healthcare Conference held earlier this year, Illumina CEO Francis de Souza said that the consumer genomics business has reached a point of inflection. Illumina's customers in the consumer genomics market, which targets individuals seeking family history and health information based on their DNA, include Ancestry, 23andMe, and Helix, a company spun off by Illumina.  

The other big growth market for Illumina is in clinical genomics. Illumina sees opportunities in population genomics (the large-scale comparison of DNA sequences of populations), non-invasive pregnancy testing (NIPT), and sequencing for rare and undiagnosed genetic diseases, which affect an estimated 350 million people across the world.

As for lowering the cost of gene sequencing, Illumina believes that the NovaSeq architecture could lead to human genomes being sequenced for only $100. The company has also launched a new system called iSeq, which costs less than $20,000. Illumina thinks the market for the iSeq system could be greater than 50,000 customers, including 35,000 that are new to NGS. 

Is Illumina stock a buy now?

You might look at the stock history for Illumina and wonder if the company is due for another period of malaise. It could be, but I don't think so. 

Most of Illumina's HiSeq X customers are expected convert to NovaSeq because of the greater flexibility of the new system. But most of them still haven't converted yet, since NovaSeq was only launched last year. That should give Illumina a nice runway for continued systems sales growth over the next couple of years. In the meantime, the company enjoys recurring revenue from consumables sales, which represented 64% of total revenue last year.

Could competitors knock Illumina off its throne? Perhaps. Again, though, I don't think it's likely. Over 90% of the world's DNA sequencing data has been generated by Illumina systems. While Illumina has several rivals, including Roche, Thermo Fisher Scientific, Pacific Biosciences of California, and privately held Oxford Nanopore, none of them can boast of a track record and reputation like Illumina claims.

Illumina will no doubt have more downturns like it has experienced in the past. But with the demand for gene sequencing rising, combined with Illumina's continual innovation, I think this stock should be a winner over the long term -- just as it has been so far.