Is Illumina a Buy?

In 2020, Illumina (ILMN +1.01%) was under pressure from customers and industry analysts who felt the company was stifling the pace of innovation. Even ARK Investment Management and its CEO, longtime advocate Cathie Wood, had a change of heart and sold their entire Illumina stake. 

Since then, Illumina seems to have changed course. First-quarter results were good across the board and pointed to improved execution. CEO Francis deSouza reported quarterly revenue rose 27% and exceeded $1 billion for the first time. Both clinical and research customers surpassed pre-COVID-19 activity levels and all regions reported record growth.

The market recognized the progress and has sent the stock price up by 15% this quarter and almost 29% this year. With second-quarter earnings expected in early August, investors may understandably be asking, "Is this a good time to buy?"

Image source: Getty Images.

No time like the present

Illumina is a profitable company with a leadership position in a large and growing market. In fact, the genomics market is in the very early stages of what can only be described as a "Genomic Revolution." If you're looking to buy Illumina, this could be as good an entry point as any.

It's estimated over 1 billion people (roughy 1 in 5 adults) have a medical condition with an underlying genetic cause. Yet only a very small percentage have had a genetic test to diagnose their condition, or recommend the best genetic therapy, or follow their progress after treatment.

As a real-world example of how genetic testing can change lives, the New England Journal of Medicine published a story in June about a baby admitted to a hospital with a life-threatening neurological condition. The condition is associated with approximately 1,500 genetic diseases, many of which are clinically indistinguishable but have unique effective treatments. Within hours, the baby was tested, the genome was sequenced, a diagnosis was made, a specific treatment was delivered, the symptoms subsided, and the baby was released. 

This is but one small example of how Illumina is playing a meaningful role in changing how healthcare is delivered. Lower-cost genetic sequencing with higher accuracy and faster turnaround times will be the key to saving other lives while unlocking a massive market opportunity for Illumina.

What to look for on the call

The Q2 results and earnings call commentary should provide more proof points on how Illumina is tracking against this long-term opportunity. Investors should look for progress in the following key areas:

1. Clinical versus research: Illumina products have long been a key enabler of genetic research. In fact, from its founding in 1998 until 2010, Illumina only sold instruments labeled "for research use only." Clinical applications are now becoming the bigger market as more genetic research discoveries are turned into medical treatments. Illumina will need to continue making progress in tailoring products, prices, and solutions to the clinical market. Investors should look for a larger percentage of revenue and higher growth from clinical applications.
2. New market segments: Illumina needs to support new high-growth market segments. In particular, oncology is an area that will drive every aspect of genomic services. It's estimated multi-cancer screening could be a $150 billion market in the U.S. Investors should look for more types of tests, customers, and volume in Illumina's future plans.
3. Price points: Illumina needs to continue lowering prices from $600 to $100 per genome. Lower pricing will open new market segments and keep competitors at bay. Investors should also look for a nuanced strategy for lowering pricing by market segment and reducing customers' total cost of sequencing in ways that don't reduce Illumina's margins.  
4. Global leadership: Illumina needs to increase its competitive moat in areas beyond price. Selling products on a global basis requires sales and support, regulatory approvals, and reimbursement from payers. That type of organizational infrastructure can't be easily matched by competitors even if they introduce new innovations. Investors should look for solid progress in supporting new customers and use cases around the world. 

Be a part of the change you wish to see in the world

It's not too late to get on board and profit from these exciting developments. As a long-term buy-and-hold investment, Illumina could make your portfolio healthier and give you a great way to participate in the coming genomic age.