Check out the latest Illumina earnings call transcript.

What happened

Shares of Illumina (NASDAQ:ILMN) rose more than 37% last year, according to data from S&P Global Market Intelligence. That was easily better than the 6.2% loss on the year for the S&P 500, but that shouldn't be too surprising. The DNA sequencing leader was immune from the year's major headwinds, including the trade war between the United States and China, rising (and then falling) energy prices, and regulatory uncertainty.

It helps that the business continued on its impressive growth path. In the first nine months of 2018, Illumina delivered revenue growth of 25% and operating income growth of 82% compared with the year-ago period. It also announced the surprise acquisition of its next closest peer, Pacific Biosciences. 

As of Jan. 11, the stock had settled to a 2.4% gain since the beginning of 2019.

A man, standing on a white platform against a blue sky, holds a large white arrow pointing upward.

Image source: Getty Images.

So what

Illumina continued to deliver on its objectives in 2018. The business launched new hardware products, grew revenue for consumables (the reagents and chemicals used to operate its machines) at a healthy clip, and continued to invest in various start-ups it may want to gobble up at a later date.

While it's not really news at this point, investors can't overlook the fact that Illumina stock is grossly overvalued right now. The company, which boasts annual revenue in the neighborhood of $3.5 billion, is valued at $45 billion. It trades at 47 times forward earnings and carries an enterprise value-to-EBITDA ratio of 40. That's definitely a little frothy. 

Now what

That valuation might be fine if there was no threat of competition, but while that's assumed to be the case given the company's dominant market position, investors appear to be ignoring signs of where the future of DNA sequencing might be headed. For example, Illumina faces huge technical risks from up-and-comer Oxford Nanopore. The British start-up has developed a new DNA sequencing technology that's quickly improving in accuracy and cost. If the current pace of development continues, then it may start to steal significant market share from Illumina in the 2020s. That threat may even be the real reason the leader acquired Pacific Biosciences.

Simply put, the DNA sequencing king is priced well above any rational valuation for what the sequencing market can support, which increases the downside if competition encroaches.