This Growth Stock Rose Last Week. Is It Still a Buy?

Shares of Illumina (ILMN -1.35%) rose 8% last week and added another 4% on Monday, reaching the stock's highest point since mid-August, on news that the company has developed a speedier gene-sequencing machine.

Illumina stock is still down more than 45% this year and the company has had its share of headaches, but I see it as a great long-term bargain right now.

Shares of Illumina trade for roughly 40 times earnings and have a price-to-sales ratio of 6.6, both of which may seem high, until you consider that the biotech has huge growth potential and has increased revenue by 4,526% over the past 10 years.

A big competitive moat

Illumina is the dominant player in the manufacturing of gene sequencers, with an 80% share of the market. Researchers in academia and biopharmaceutical companies use gene sequencers for genetic testing, and the company just took a giant leap forward with a new sequencer, the NovaSeq X, which has a throughput that is 2.5 times faster than its current top model, capable of analyzing 20,000 genomes a year. Not only will the NovaSeq X speed up medical genetic research, it will also reduce the cost of gene sequencing. When the company first introduced gene sequencing, it cost $1 million to produce a human genome in 2007. With the new system, some of the company's clients are saying the device will lead to a $100 genome.

Taking a look at Illumina's finances

The biotech company's shares took a hit when it released its second-quarter report in mid-August. The good news was that revenue was $1.16 billion, up 3% year over year. However, Illumina had a per-share loss of $3.40, compared to earnings of $1.26 per share in the year-ago period. The company also issued cautious guidance, saying it expected annual revenue between $5 billion and $7 million, or 4% to 5% growth, with a loss per share between $2.93 and $2.78. Illumina cited a host of reasons, including inflation, reduced spending by clients, customer lab expansion delays, the impact of a costlier dollar, and an economic downturn in China.

However, if you take a step back, those are all short-term macroeconomic challenges that should pass. Over the past eight quarters, the company's revenue has risen every quarter but one. Illumina has more than 9,100 customers for its machines across 150 countries. Servicing those clients on a long-term basis with the supplies and technical expertise needed to keep the machines running also adds to the biotech's profits.

The problem with being a near-monopoly

Over the years, Illumina has bought up competitors in gene sequencing, including Solexa in 2007 and Epicentre Biotechnologies in 2011. However, the company's attempt to buy Pacific Biosciences was struck down in 2019 by the Federal Trade Commission (FTC). Just last year, the FTC voted against the biotech's $7.1 billion purchase of cancer researcher Grail, which was itself spun out of Illumina in 2015. Ultimately, the FTC's decision was overturned by an administrative law judge on Sept. 1, 2022. However, the purchase is still on hold because the European Commission on Sept. 6 struck down the deal as being anticompetitive. Illumina said it plans to appeal the decision, but obviously, this complicates matters for the company and adds to its legal costs, at least in the short term.

Illumina's point is that it can help accelerate Grail's ability to market its Galleri blood test to detect more than 50 types of cancer, thus saving lives, because Illumina has the resources to get regulatory approval and insurance reimbursement, as well as scale up production and distribution of the test, making it more affordable to more people. The regulatory groups' concerns are that by combining the two companies' gene-sequencing capabilities in a single entity, the acquisition could stifle innovation and perhaps lead to higher prices.

Looking forward

Illumina is bullish on the potential for its gene-sequencing products, saying their market could reach $120 billion by 2027, though next year could be a tough one as it ramps up sales of its new sequencers.

Looking at who the company is rubbing elbows with, it's clear that others see potential in Illumina. Former President Barack Obama and Bill Gates, along with Nobel laureate Frances Arnold, an Illumina director, all spoke at the Illumina Genomics Forum that wrapped up earlier this month. The company also just entered into a strategic research collaboration with AstraZeneca on drug target discovery. The companies said they will work together on artificial intelligence-based genomic analysis and interpretation, helping to identify better prospects for drug target discovery.

Illumina doesn't need the Grail purchase to be completed to continue its phenomenal growth. However, it will help whenever the situation is settled. Once the purchase is either allowed or doomed for good, the stock should be able to continue its rise. In the meantime, buying Illumina while it is still down 47% for year the makes sense for long-term investors.