Is anyone surprised in the least that providing the tools to enable unlocking the secrets hidden in the human genome has turned out to be a high-growth enterprise? They shouldn't be.
Illumina (NASDAQ:ILMN), the world leader in gene-sequencing technology, has certainly been on a roll lately. The company enjoyed a tremendous year in 2017. It kicked off 2018 with fantastic Q1 results. Illumina stock soared more than 70% last year and is up over 20% year to date.
With everything going great for Illumina right now, the company's CFO, Sam Samad, didn't feel much pressure as he spoke at the Bank of America Merrill Lynch Health Care Conference on Wednesday. Samad said five things every Illumina investor needs to know.
1. It's still really early for the NovaSeq launch
Illumina introduced the NovaSeq gene-sequencing system in early 2017. The launch of this new system was a primary catalyst for the company's great performance last year. Samad pointed out some good news for Illumina investors: It's still really early in the NovaSeq roll-out.
Samad stated that as of the end of 2017, only 15% of Illumina's HiSeq and HiSeq X customers had purchased their first NovaSeq system. While the company has been pleased with the launch of NovaSeq so far, it has planned all along for a multiyear process for transitioning customers to the new system. Samad said Illumina still anticipates selling 330 to 350 NovaSeq systems in 2018.
2. Illumina's total addressable market is much bigger than previous projections
Back in 2014, Illumina estimated that its total addressable market was roughly $20 billion. The company generated revenue of $2.75 billion last year, so there's plenty of room for growth to reach even half of that projected market. But Samad said that $20 billion figure is now outdated.
Illumina isn't providing a new estimate for its total addressable market, but Samad acknowledged that "it's definitely greater than $20 billion." He pointed out several examples that weren't included in the number that the company gave in 2014, including liquid biopsies, population sequencing, and average-risk non-invasive pregnancy testing (NIPT).
3. The company especially keeps its eyes on three competitors
Illumina is the biggest and arguably the best gene-sequencing company in the world. However, it doesn't enjoy a monopoly. Several smaller players compete in the space. Samad said Illumina especially monitors three of its rivals, admitting that the company has "a healthy amount of paranoia about competition."
He first mentioned Oxford Nanopore. Samad stated that the privately held U.K.-based company has "interesting technology." However, he added that Oxford Nanopore is "still challenged by accuracy" and would have to improve its accuracy by 200% to 300% to catch up with Illumina.
Samad listed Thermo-Fisher Scientific as another rival that it closely watches. He pointed out that the company claims "a solid distribution network in Asia."
Samad also noted that Illumina monitors Beijing Genomics Institute (BGI). The company is well-financed as a result of its support from the Chinese government. Samad said that Illumina pays close attention to BGI because China is an important market for gene sequencing.
4. No big worries about a trade war with China
Speaking of China, Samad was asked if Illumina was concerned about the potential of a trade skirmish between the U.S. and China. He replied that "it was good that the rhetoric has subsided." Samad acknowledged, though, that the Chinese market has a sizable impact on Illumina's overall business.
However, he didn't express significant concern about a U.S. trade war with China. Samad noted that Illumina's customers in China have "a pretty serious commitment" to their gene-sequencing initiatives. He added that their efforts "can't be easily directed," because customers who use Illumina's systems must use the company's consumables.
5. The investment thesis for buying Illumina isn't mainly about instrument placements
NovaSeq system sales have been key to Illumina's recent success. Samad cautioned, though, that investors shouldn't focus too much on this system -- or any other of Illumina's systems, for that matter. He said that the biggest misconception people have about Illumina is that "the investment thesis is all about instrument placements."
In April, I highlighted Illumina's sequencing consumables growth as one of the biggest stories that the company's Q1 earnings results didn't tell. Samad confirmed this thought, stating that while instrument placements are important, "what's more important is the adoption of sequencing and continued growth of sequencing consumables."
Could there be bumps along the way with consumables sales? Sure. Samad said the company could experience some "air pockets" where NovaSeq consumables growth doesn't offset HiSeq consumables declines enough to meet expectations. However, he quickly added that Illumina isn't concerned about those temporary problems because the company is confident that consumables demand will increase over the long run.
For long-term investors, recurring revenue that will trend upwards for years to come should be one of the biggest things to like about Illumina stock.