Illumina's (ILMN 1.02%) stock is down by 15% this year so far, and it's no surprise why. With the new disclosure of a Securities and Exchange Commission (SEC) investigation into its bedraggled acquisition of Grail, a genetic-testing company it originally founded, and a $476 million fine from regulators in the E.U. just one month ago on account of the purchase in advance of regulatory permission, things look fraught.
And that's before even taking into account the instability that its recent and ongoing leadership shake-up may have caused: the exit of its chief executive officer (CEO), chief financial officer (CFO), and chief technology officer (CTO), as well as the addition of two new board members amid a proxy fight with activist shareholders.
So is this turbulence just a bump in the road that'll soon give way to growth once more, thereby justifying buying the dip, or is ongoing stagnation the more likely outcome? Let's dive in and figure it out.
The argument for buying the dip
The bull thesis for Illumina stock has nothing at all to do with its most visible struggles resulting from the Grail acquisition. In short, regardless of what's been happening recently, Illumina is positioned as the biopharma sector's go-to manufacturer of gene-sequencing hardware. When customers want to run their samples on the devices they own, they need to buy consumable reagents from the company to do so. In the second quarter, its revenue was roughly $1.2 billion, up 230% from 10 years ago. Of that total, $739 million was from consumables.
As time goes by and more customers have sequencers, the more reagents Illumina will sell in perpetuity, generating reams of recurring revenue at a low cost. And there aren't any competitors that have such a lock on the market, nor devices with as many capabilities. As long as those core devices remain in demand (and without a major disruption in the underlying genetic science, they probably will be), bulls are correct in saying that the business will be hard to topple. This razor-and-blade business model has been key to its longevity and success over the last decade or so.
In that context, there is little stopping its long-term march toward greater heights for shareholders. Incremental investment in research and development (R&D) can continue to develop the capabilities of its installed sequencers to keep customers using them more and more. Plus, steady progress in sequencing science, much of which occurs due to the company's direct involvement, will ensure that it remains king of the market.
But there are signs that the sunny story above is starting to look a bit worn out.
It's better to stay on the sidelines
Aside from all of the self-inflicted drama with its Grail acquisition, Illumina's growth engine is sputtering. Management doesn't see the company's revenue growing by more than 1% in 2023. And that reliable, recurring revenue mentioned earlier? Consumable sales for high-throughput sequencing applications took a serious hit this year beyond what leaders anticipated. It's also looking to slash $100 million in expenses, which means it may be laying off employees or reducing the number of facilities needed to service demand or invest in R&D for growth.
Furthermore, while it is planning on selling a new accessory for its new NovaSeq X and onboarding a new capability or two for its older sequencers, major new product launches are likely to be some time away. Don't expect any bursts of fresh growth, even with the large changes to the C-suite and few competitors on the horizon. What's more, it isn't consistently profitable anymore, though it was roughly a year ago.
Therefore, when considering the stock, in addition to the ongoing problems with the Grail acquisition (which it may need to unwind entirely soon enough), there isn't a reason to buy Illumina on the dip right now. It could eventually recover to deliver good returns to investors in the future. But right now, there's too much uncertainty about how it would get from here to there. Investors should keep away from Illumina for the time being.
