We came across a bullish thesis on Illumina, Inc. (ILMN) on Ocean Road Capital’s Substack by Ocean Road Capital. In this article, we will summarize the bulls’ thesis on ILMN. ILMN Technologies, Inc.’s share was trading at $132.27 as of Sept 25th. ILMN’s forward P/E was 29.41 according to Yahoo Finance.
Pixabay/Public Domain
Illumina is a global leader in DNA sequencing and array-based technologies, serving academic, clinical, and applied markets. Founded in 1998, the company rose to prominence after acquiring Solexa in 2007.
Illumina generates revenue through three primary segments: Its instruments, including the NovaSeq series, support a variety of genomic applications. Consumables, such as sequencing kits and genotyping arrays, are recurring revenue drivers, tied to the usage of the company’s installed base of sequencing instruments. Services offered include whole-genome sequencing, non-invasive prenatal testing, and genotyping. Illumina operates in the rapidly growing genomics industry, where key competitors include companies like Thermo Fisher Scientific and BGI, which also provide sequencing solutions and consumables.
Illumina’s acquisition of GRAIL was a major mistake, but divesting GRAIL is a turning point. Illumina can now focus on its main business, which holds about 80% of the next-generation sequencing (NGS) market. Their business model relies on selling instruments and consumables, which brings in steady revenue. Without GRAIL, Illumina can grow its genomics ecosystem, benefiting from high switching costs and a growing user base in research and clinical markets. This shift is expected to boost growth and profitability, making Illumina stock a good long-term investment.
The clinical market, especially oncology diagnostics, is a big growth area for Illumina. This market could reach $75 billion by 2035, growing at 27% CAGR annually. Illumina’s sequencing technologies are crucial for this market, used in tumor analysis, cancer screening, and precision oncology. While GRAIL’s cancer detection tests faced challenges, Illumina’s core technologies are still important for cancer monitoring and reproductive testing, which have fewer regulatory issues.
With GRAIL gone it has had a positive impact on Illumina’s cost structure and margins. Under previous leadership, expenses rose. Illumina is now reducing expenses by $175 million through workforce reductions and cuts in vendor spending and particularly in R&D it is targeting to spend roughly 10% of revenue while maintaining its innovative edge all of these measures could lead to improvements in Gross Margins in 60-70% range and operating margins to 20-30%. This improvement will come from increased efficiency, cost-cutting measures, and better utilization of NovaSeq X instruments.
Despite competition from companies like Element Biosciences and Ultima Genomics, Illumina’s established ecosystem and customer loyalty are strong defenses. The NovaSeq X system is competitive in price and functionality, and continuous innovation will help maintain its leadership. Overall Illumina’s outlook has improved after the sell-off of GRAIL. The stock has a potential upside of about 56%, with a fair value estimated at $183 per share, using a 24x 2025 estimated P/E multiple, similar to other life sciences diagnostics tools companies.
Illumina, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 56 hedge fund portfolios held ILMN at the end of the second quarter which was 48 in the previous quarter. While we acknowledge the risk and potential of ILMN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ILMN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article was originally published at Insider Monkey.