What: After lackluster first quarter financials resulted in a steep sell-off in shares, investor optimism tied to future demand for gene sequencing resulted in Illumina, Inc. (NASDAQ:ILMN) shares jumping 18.2% in July, according to S&P Global Market Intelligence.
So what: Demand for Illumina's gene sequencing machines and the consumables used to run them have rewarded investors handsomely over the past five years, however, stumbles in Europe this year are weighing down sales and profit and disappointing investors.
In Q1, the company reported that operational struggles in the region resulted in sales slowing to 2% year-over-year growth in Europe. That performance was far shy of the company's targets for double-digit growth and as a result, management announced a slate of changes to its European business to get back on track.
Unfortunately, second quarter financial results in Europe suggest that a reacceleration there may take longer than hoped. Sales in Europe slipped 4% versus a year ago in the quarter.
Although European headwinds shouldn't be ignored, they should be taken in context to the greater growth occurring elsewhere. So far, European weakness is being more than made up for by strength in the Americas and Asia. Americas sales were up 13% year-over-year and Asia-Pacific sales jumped 29% year-over-year last quarter.
Population gene-sequencing initiatives in China supported sales in Asia and an improving backlog and greater demand for arrays supported global sales. Worldwide, Illumina's second quarter sales grew 11%.
The Q2 results were strong enough that management says total sales will increase by about 12%. That may not be as rapid of growth as seen in the past, but cost-savings initiatives should generate EPS of at least $3.48 this year and that's better than the $3.35 or higher estimate issued by management exiting Q1.
Now what: High-margin consumables are a big reason why investors have flocked to Illumina in the past. After all, sales of supplies for gene sequencing are recurring and that means that profitability improves with every sequencing machine that gets put into service. Currently, consumables account for 63% of the company's sales, or $379 million last quarter alone, and that number should continue to climb.
Additionally, investors could see significant growth from two Illumina start-ups that are attempting to make gene sequencing mainstream.
Last summer, Illumina created Helix, an online "app" store that will allow consumers to sequence their DNA, store it at a secure off-site location, and then buy apps that screen their DNA in various ways. Earlier this year, Illumina also created Grail, a company that will use deep sequencing to look for DNA markers associated with cancer. Of the two, I'm most interested in Grail's potential. By using next-generation sequencing technology, Illumina may be able to diagnose cancer earlier than ever before. If so, then Grail could become a standard of care in patients who are at risk of cancer. Illumina believes the addressable market could eclipse $20 billion or more and if they're right, that would dwarf the company's opportunity in gene sequencing today.