What a fantastic six months it’s been for Illumina. Shares of the company have skyrocketed 126%, hitting $273.47. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Illumina, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Illumina Not Exciting?
We’re happy investors have made money, but we’re passing on Illumina for now. Here are three reasons why there are better opportunities than ILMN, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in Genomics & Sequencing companies should track organic revenue in addition to reported revenue. This metric gives visibility into Illumina’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Illumina failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Illumina might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Illumina, its EPS declined by 3% annually over the last five years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Illumina’s five-year average ROIC was negative 1%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.
Final Judgment
Illumina’s business quality ultimately falls short of our standards. After the recent surge, the stock trades at 47.4× forward P/E (or $273.47 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Illumina
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