Not every recently fallen stock is guaranteed to bounce back. For example, over the last five years, Illumina's (ILMN 0.38%) stock is down nearly 5%. But losing 33% of its market value in the last 12 months might still leave investors interested in buying the dip with this gene sequencing hardware manufacturer.

But this gene sequencing maestro is quite the risky investment. Here's why it's better to stay on the sidelines for now.

What's causing the dip

For those who aren't familiar, Illumina is the undisputed king of the gene sequencer hardware market, to where many accept it as a quasi-monopoly.

When healthcare systems or research laboratories need to analyze genetic material, the company's devices are the industry's standard, and it has a product in every segment of the market. That means its devices range from toaster-sized laboratory sequencers for researchers working at small scales, to refrigerator-sized high-throughput sequencers for industrial-scale applications in big pharma businesses and massive clinical operations. So no matter whether its customers need to analyze only one sample or one thousand samples at once, there's a machine for it. And an Illumina sales rep is likely already on speed dial thanks to ubiquitous marketing coverage. 

Then the company collects a secondary revenue stream when those customers need to buy more consumables to operate their devices. Its razor-and-blade business model means that people who buy the stock can, in theory, sit back and see their shares rise in value for years as Illumina continues to make money from a customer base that doesn't really have anywhere else to go. And when those customers need to expand or update their sequencing capabilities, they'll once again reach for the phone to call up Illumina.

But in most contexts, its customers don't need too many different pieces of sequencing hardware to meet their needs. Likewise, most customers aren't going to need the latest and greatest gene sequencer when their needs are more mundane. And that's part of the reason why the company's revenue dipped by 10% year-over-year in the fourth quarter of 2022, arriving at $1.08 billion. Furthermore, its 2021 purchase of the cancer testing company Grail to juice more top-line growth is floundering badly, with antitrust regulators calling for it to be sold off.

In light of the above, Wall Street analysts are predicting that Illumina's shares will rise by around 5.1% on average in 2023, and that its top line will rise to reach $4.9 billion. Management concurs with that figure, and estimates that its core segment of sequencers and consumables will grow by 8%, give or take 1%. In the long term, the business could leverage its slow-paced growth in the number of its installed sequencing devices to capture the recurring revenue generated by sales of its consumables, thereby generating plenty of additional capital that it could then either return to shareholders or invest in further work to penetrate its markets. 

There are better places to invest right now

Buying the dip right now means taking a substantial risk on two factors. First, that Illumina will be able to return to growth and become a more valuable company in the future than it is today, bringing its share price upward, even given the headwinds it's going to face as it divests Grail and sees its core sales segments buckle. And second, that it'll remain the dominant player in the gene sequencer hardware space for the foreseeable future. The second factor is largely a given, but the first one is less certain, especially in the near term, so the risk is more likely to be realized to the detriment of shareholders than not. And that makes it much less attractive to buy the dip.

Over the long term, the market on average rises by around 10% annually. Right off the bat, that means the odds are that your money could outperform Illumina stock's anticipated gain of 5.1% if parked in an index fund, if the next 12 months turn out to be an average year for the market. And index funds are also significantly less risky than any single company that's a component of the index, so you'd be potentially getting a higher return with a lower chance of a drawdown. In the context of a business that's facing revenue headwinds, that de-risking provided by an index fund is even more valuable. 

Remember, the near-term rewards of an investment in Illumina are likely to be modest. The medium-term won't necessarily be better, either. Though the market for gene sequencer hardware is anticipated to grow over the next five years to reach $23.8 billion by 2028, with a compound annual growth rate (CAGR) of 18.6% according to a report by Mordor Intelligence, over the last 10 years Illumina's annual sales rose by an average of 15.6% per year. That's hardly rapid top-line growth, and given how saturated its market is, it may not be able to continue at that pace. But the more important point is that the conditions are ripe for the market to expect a slower expansion of Illumina than that of its underlying market, which implies that it could slowly but surely start to lose ground to competitors. 

There's no guarantee that Illumina is doomed. Still, with difficult conditions ahead and no ideas on the table about how to make the stock more attractive to shareholders, it's best to look elsewhere.