As Warren Buffett says, it's best to be greedy when others are fearful, and right now we're in fearful times. Even stellar growth stocks are crumbling from economic headwinds and panic about looming interest rate hikes. That means there's an opportunity for enterprising investors to set themselves up for future success with the timely purchase of a quality stock.
Over the last 10 years, Illumina's (ILMN +0.36%) return of 380% absolutely smashed the market's gain of 246.1%. To accomplish that feat, it sold, installed, and serviced more than 20,000 of its gene sequencer devices, which hospitals and biomedical researchers use to analyze genetic information. But over the last 12 months, its fortunes have been entirely the opposite, with its shares crashing by 55% compared to the market's decline of merely 10.6%. Here's why you should strongly consider buying the dip instead of looking for growth elsewhere.
NASDAQ: ILMN
Key Data Points
Why Illumina is struggling
The reasons for Illumina's recent decline are numerous, and slowing growth is one of them. Per its second-quarter earnings report, its Q2 revenue of over $1.1 billion is only 3% higher than a year prior, and it wasn't profitable in the three-month period either. It may also be experiencing sales headwinds from efforts to control the pandemic in China, like many other growth stocks. What's more, it's struggling with thorny legal issues in the E.U. as well as the U.S. pertaining to its potentially anticompetitive acquisition of the genetic testing company Grail.
Still, those problems are almost certainly temporary. China won't be disrupted by its pandemic containment efforts forever. Furthermore, slower top-line growth is to be expected during periods of economic upheaval, as the company's devices are expensive capital purchases that its customers typically don't need too many of. Likewise, if on September 9 regulators in the E.U. find that its acquisition wasn't kosher, Illumina could be forced to pay 10% of its sales turnover as a one-time fine, assuming it divests Grail as instructed after the ruling. After that, it could continue with its business as usual with no further impediment, and get back to playing its long game.
The dip won't last forever
Its future expansion hinges on the fact that 80% of the company's revenue is recurring, as customers who buy its gene sequencers need to regularly purchase consumables like sample cassettes and various chemicals to analyze samples on the machines. In 2021, sales of those consumables grew by 40%, and it's possible that pace could even accelerate over time with the right new products hitting the market. Customers also need to buy service contracts, software packages, and accessories, so each sequencer it sells implies significant opportunities for more growth down the line before even considering consumables.
In terms of its positioning, there aren't any competitors that pose a major threat, and no other sequencing hardware maker has a brand that's anywhere near as reputable. That's part of why it already has a dominant share of the global market for coronavirus surveillance testing, which could be worth $165 billion over the next seven to ten years. More than 75% of COVID case data submissions worldwide are generated from one of Illumina's devices, and that proportion is unlikely to change given that the public health organizations responsible for gathering case data are usually loath to spend on cutting-edge tools when the ones that they have can do the job.
And that's not even considering the money it'll make from developing and launching sequencers with new capabilities. It might take a few years for Illumina's top line to return to the mid-teens percentage point growth in its core revenue that management desires, but it'll likely get there eventually -- and when it does, people who bought the dip will be rewarded kindly. But in the meantime, don't expect it to outperform the market.
