Illumina Stock Sees Light: GRAIL Is Gone, Focus Is Restored (NASDAQ:ILMN)

Introduction

Light up (NASDAQ:ILMN) has finally dumped GRAIL. My last look at the stock came after its 2023 financial report, in which revenue and gross margins fell and SG&A expenses rose. The company also projected “roughly flat” revenue in 2024. This was in the context of an assessment that was rich. My recommendation was “sellnoting that the company's “premium valuation is not justified by its current performance or future prospects.” Illumina shares are down 1.68% since this update, while the S&P 500 has returned nearly 10%. It has therefore underperformed. Since then, the company has reported two quarters of financial data and had some important operational developments, which are worth another look.

Illumina Post-GRAIL: A Strategic Shift Toward Core Growth

As mentioned in the first sentence, Illumina eventually got rid of GRAIL. Recall that the company acquired GRAIL (a company focused on early cancer treatment) detection by blood tests) in 2021 for about $7.1 billion. However, the acquisition faced intense scrutiny, particularly from the European Commission, due to concerns that the merger could limit competition in a burgeoning field of early cancer detection. The EC ordered Illumina to divest GRAIL. The company finished The GRAIL spin-off (GENERAL) in June 2024 through a sale to a third party (although Illumina retains a 14.5% stake in GRAIL). Today, GRAL trades at a market cap of $500 million.

The focus is therefore returning to Illumina’s core business of DNA sequencing and array-based technologies. The company recently outlined its plan (2024 Strategy Update Special Call) to drive revenue growth to high single digits by 2027, achieve double-digit EPS growth between 2025 and 2027, and expand margins. The company is primarily betting on growth within the “$10 billion” next-generation sequencing segment. [NGS] market.

From Illumina Second quarter earnings In the second quarter, Core Illumina's sales and revenue amounted to $1.092 billion, with a gross margin of 68%, an improvement from 65.5% in the same period last year. R&D and SG&A expenses amounted to $241 million and $60 million, respectively. Core Illumina's operating profit was $442 million and its operating margin was 40.5%. Net profit was $66 million. Looking at the overall picture of the second quarter, due to the divestment, Illumina recorded $1.886 billion in “goodwill and intangibles” impairments. This contributed to an actual net loss of $1.988 billion in the second quarter.

Illumina is recognized as a leader in NGS and controls the majority of the global market for DNA sequencing instruments and consumables. This is evident in its ability to generate billions of dollars in annual revenue from its NGS segment, outperforming competitors by a significant margin. Its platforms, such as the NovaSeq and MiSeq systems, are widely adopted in research institutions, clinical laboratories, and biopharmaceutical companies. This makes it challenging for these organizations to easily switch. The company invests heavily in R&D to maintain innovation, establishing new reference points in terms of performance, accuracy and cost per genome. They have finally entered into strategic collaborations with companies like Roche (OTCQX:RHHBY) and Amazon Web Services (AMZN).

Financial health

As of June 30, Illumina reported $920 million in cash and cash equivalents. Total current assets were $2,459 million, while total current liabilities were $2,208 million. Subsequently, its current ratio is >1, indicating its ability to cover short-term obligations. Illumina has $1.49 billion in long-term debt, but this appears manageable given that Illumina’s core business is profitable. Even with the challenges of GRAIL, net cash provided by operating activities was $157 million in the first six months of 2024. As such, there is no need to estimate the cash runway.

Peer comparison

Illumina's valuation is more favorable compared to February (“F”).

Compared to other companies in the life sciences tools and services sector, ILMN maintains a very high valuation that calls for significant growth. Its non-GAAP P/E, for example, of “36,” outperforms peers such as Agilent (A), Thermo Fisher Scientific (TMO), and Qiagen (QGEN), which trade in the mid-20s. Year-over-year revenue growth is flat or down between 1% and 6% for each company, reflecting some macroeconomic challenges. Illumina drives favorable gross profit margins. Its 66% gross profit margin exceeds Agilent’s 50%. However, Illumina’s stock returns are significantly lower than its peers since 2019.

Risk/reward analysis and investment recommendations

In conclusion, Illumina has completely left GRAIL behind and appears to be making progress in its operations (e.g., improved margins, cost-cutting plans, etc.). Even though its stock has seen a modest rebound recently, the market remains cautious. After all, Illumina remains concerned about continued revenue declines amid competitive pressures in the genomic sequencing market.

My stock evaluation process has changed slightly since my “sell” recommendation in February. I am currently evaluating stocks for value within a barbell portfolio, in which most funds are allocated to lower-risk assets such as Treasury securities, with a small portion reserved for speculation. Therefore, I am more risk tolerant than I was a few months ago. ILMN is a quadrant 1 (high risk/high return) stock with promising growth prospects in an NGS market poised for significant expansion over the next few years. With GRAIL behind them and a solid plan for reasonable growth in place, I am willing to change my recommendation to “buy.”buy.”

However, investors should pay close attention to the company’s ability to turn things around. Importantly, Illumina will surely face increased competition from companies like Thermo Fisher Scientific and Agilent, which are also investing heavily in NGS. Finally, ILMN, like most of its industry, is vulnerable to macroeconomic headwinds. For example, during tough economic times, healthcare providers and consumers may postpone or reduce spending on non-essential medical procedures, such as NGS. Inflation increases operating costs, such as raw materials and labor. Illumina operates globally and is therefore vulnerable to tariffs, trade restrictions, and global supply chain disruptions.