What happened

Shares of DNA sequencing leader Illumina (NASDAQ:ILMN) have kept their rally from 2017 going through the first half of 2018, having gained 28.3% thus far. The stock is now up 119% in the last 18 months, which has pushed the company's market valuation to more than $41 billion.

While that's now bringing back the age-old debate over the premium valuation of shares, the company has announced quite a few operational updates to keep Wall Street abuzz with excitement. Illumina has launched a new desktop DNA sequencing system called the iSeq 100, which sells for a base price of under $20,000. Several new collaborations in oncology diagnostics have been inked. And investors are looking forward to the slow and steady rise of a system that could one day enable human genomes to be sequenced for $100 apiece.

A hand pulling up the last and tallest bar in a bar chart showing growth.

Image source: Getty Images.

So what

It took scores of researchers many years and $3 billion to sequence the first human genome, which was finalized in 2003. The NovaSeq system was launched in 2017 and, with the right improvements to software and consumable reagents (and a lot of accounting tricks), it's expected to eventually deliver $100 genomes in less than a day. The state of DNA sequencing technology has come a long way, and Illumina has led that exponential ramp down the cost curve.

While Wall Street is keeping a close eye on the number of NovaSeq systems out in the wild (285 in mid-June), management has been quick to remind investors the ramp-up will take time. For one, they're expensive machines. For another, not many customers (a handful of genetic testing companies and medical centers) need the system, and most that could use it are still paying off their multimillion HiSeq systems purchased earlier this decade. 

Considering 64% of total revenue is derived from consumables, or the chemical reagents and kits needed to run the 11,000 Illumina instruments in labs worldwide, the NovaSeq system may not be that big of a driver for the business in the near term anyway. The company has wisely focused on growing consumable product offerings to build recurring revenue streams and offset the choppiness of selling hardware. With a 28% compound annual growth rate from 2012 to 2017, investors might call it a success. 

In 2018 Illumina has made a big push to do the same in oncology diagnostics, building out a portfolio of genetic tests for use in the clinic and in clinical trials with Bristol-Myers Squibb, Loxo Oncology, and others. Investors are excited about the possibilities for future, diverse growth.

Now what

While things are humming along for the business right now, investors shouldn't overlook the rise of nanopore sequencing technology. If the companies developing the technology continue to find success, then they could steal significant DNA sequencing market share in the next decade. In the near term, investors can expect Illumina stock to continue to bounce around in the second half of 2018 as investors debate the stock's premium valuation (50 times future earnings) and the company's $40 billion market cap (sitting at 14 times sales). It has managed to outrun and outgrow those concerns in the past, but new competition could make that more difficult.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.