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Better Buy: Invitae vs. Illumina

By Alex Carchidi – Jun 26, 2020 at 8:13AM

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Illumina is practically an institution in the biotech sector, but can it outgrow an aggressive competitor?

Illumina (ILMN 7.73%) and Invitae (NVTA 11.02%) are two exciting genetic testing companies at dramatically different phases of the corporate lifecycle. For investors seeking a balanced biotech portfolio, there's a lot to appreciate about each of these companies, both of which look to have bright futures. But which company is the better buy for long-term growth?

Illumina gracefully jumps into the COVID-19 test market while expanding its operations

As the biotech industry's premiere manufacturer of genetic sequencing hardware and molecular biology reagent kits, Illumina powers drug development and clinical genomics alike. Between acquiring the cloud genomics analysis company BlueBee and receiving emergency use authorization from the U.S. Food and Drug Administration (FDA) for its COVID-19 diagnostic test -- both of which happened in June -- Illumina is capitalizing on the pandemic rather than being slowed down by it. But there are a few factors that suggest Illumina's stock price will face some headwinds as it grows.

A chart of several stocks.

Image source: Getty Images.

Illumina's trailing price-to-earnings (P/E) ratio of 56.4 is somewhat lower than the biotech industry's average of 77.6, which suggests that the market expects its growth to be a bit lower than average. With a profit margin of 26.5% and trailing 12-month revenues of $3.6 billion, Illumina is a profitable company, but its year-over-year quarterly revenue growth is only 1.5%, and its quarterly earnings growth is negative 25.8%.

In the first quarter of this year, Illumina initiated a share buyback program, aiming to repurchase $750 million of its outstanding stock over the next year. This means that there will be some upward pressure on Illumina's stock price, even in the absence of favorable earnings growth. 

Invitae eyes a merger while gobbling up promising startups

Invitae seeks to make medical genomics a mainstream part of medical care. The company's primary products are genetic testing kits that patients can use when there isn't a convenient hospital or genetic testing clinic nearby. However, Invitae has also branched out into offering chatbot support services for genetic medical professionals considering whether to direct patients to use the company's tests, and if so, which ones. 

Unlike Illumina, Invitae has shown a voracious appetite for expanding its core businesses via acquisitions. Invitae purchased three different bioinformatics companies in March, paying $95 million, $79.3 million, and $20.7 million respectively in cash and stock. These acquisitions are in addition to the seven other small companies that Invitae has purchased over the last three years. 

Nonetheless, Invitae's trailing 12-month revenue is only $240.5 million. While that revenue is growing, with year-over-year quarterly revenue expanding by an impressive 58.4%, the company is far from being profitable; its profit margin is a negative 125.9%. Likewise, the company's $322.7 million in debt exceeds its $294.6 million in cash on hand, meaning that shareholders will likely push for a payment plan. Invitae raised $173 million by issuing new stock in April, so it is unlikely to encounter any cash flow issues despite its debts. 

Finally, Invitae recently announced that it was considering a merger with ArcherDX, a private oncology genetic testing company. The deal is slated to close at the end of this year for an estimated up-front value of $886 million, $325 million of which would be in cash. The company expects that the merger will drive about 50% of additional revenue growth over the next five years by giving Invitae a chance to compete in the $40 billion cancer genomics and monitoring market. 

ILMN Chart

ILMN data by YCharts.

Invitae's growth trajectory is probably steeper than Illumina's

Between Invitae and Illumina, Invitae is by far the better buy because it is a much smaller and newer company that has more room to grow as well as a demonstrated history of rapid growth via acquisitions. Even without its planned merger, Invitae's growing portfolio of small companies, aggressive quarterly revenue growth, and compelling value proposition would still be extremely compelling. 

Keep track of Invitae's quarterly reports to see how the merger with ArcherDX is proceeding, and keep in mind that its long-term growth will likely dwarf its short-term gains.

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

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Stocks Mentioned

Illumina, Inc. Stock Quote
Illumina, Inc.
$201.29 (7.73%) $14.45
Invitae Stock Quote
$2.62 (11.02%) $0.26

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