Here's Why Illumina Tumbled 18.7% in July

Growth stagnated in the first half of 2019. Management says it will be temporary.

Maxx Chatsko
Maxx Chatsko
Aug 5, 2019 at 11:55AM
Health Care

What happened

Shares of Illumina (NASDAQ:ILMN) fell nearly 19% last month, according to data provided by S&P Global Market Intelligence. The titan of DNA sequencing released preliminary second-quarter 2019 operating results in mid-July and followed that up with the full report before the end of the month. While the sky isn't falling, the business did hit a speed bump.

Illumina reported year-over-year revenue growth of just 1% in Q2. The business also coughed up a year-over-year decline in operating income and a sharp drop in cash-flow generation in the first half of 2019. The surprising stagnation of the financial health of the company was compounded by a delay in its proposed acquisition of Pacific Biosciences

A declining chart drawn on a chalk board

Image source: Getty Images.

So what

Management was blunt about the disappointing performance, but CEO Francis deSouza told investors the headwinds are expected to be temporary. Overall revenue growth slowed due to a delayed customer order, although consumables revenue -- consumables are the chemical reagents needed to run the sequencing machines -- continued to expand. Besides, Illumina ended June with $3.2 billion in cash, which gives it more than enough security to weather choppy periods from time to time.

The business reported a slight decline in first-half 2019 operating income compared to the year-ago period, but a one-time surge in "other" income drove a healthy increase in net income. 

Metric

First Half 2019

First Half 2018

Change

Revenue

$1.37 billion

$1.30 billion

5%

Gross profit

$1.16 billion

$1.11 billion

4%

Operating income

$410 million

$445 million

(8%)

Operating margin

29.9%

34.2%

(430 basis points)

Net income

$529 million

$417 million

27%

Cash flow from operations

$341 million

$550 million

(38%)

Data source: Press release. 

Even if the performance amounts to a small hiccup, as management contends, investors are right to worry over the fate of the proposed acquisition of Pacific Biosciences. The United Kingdom has deepened its investigation into the merger and could thwart it to protect its homegrown DNA sequencing star, Oxford Nanopore. That would spell disaster for Pacific Biosciences and leave Illumina with few good options to reposition itself for the inevitable rise of nanopore sequencing. The business might find it easier to pivot, but that could prove costly and inject a lot of uncertainty into the situation, which could sting considering the company's excessive premium. 


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Now what

Illumina might dominate the DNA sequencing markets today, but the company is valued at several times the value of the total global market. Given the insane premium, investors can't be too surprised that Wall Street reduced the company's market cap at the smallest signs of trouble. That said, if the business continues to struggle in the second half of 2019, or if its proposed acquisition of Pacific Biosciences gets nixed by regulators, the stock could continue heading lower.