{"id":4998,"date":"2023-10-24T11:36:35","date_gmt":"2023-10-24T11:36:35","guid":{"rendered":"https:\/\/infundpros.com\/news\/illumina-stock-mispriced-jewel-at-maximum-pessimism-nasdaqilmn\/"},"modified":"2023-10-24T11:36:37","modified_gmt":"2023-10-24T11:36:37","slug":"illumina-stock-mispriced-jewel-at-maximum-pessimism-nasdaqilmn","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=4998","title":{"rendered":"Illumina Stock: Mispriced Jewel At Maximum Pessimism (NASDAQ:ILMN)"},"content":{"rendered":"
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Illumina (NASDAQ:ILMN<\/span>) is the world leader in gene sequencing with about 75% global market share and 90% domestic share. The sequencing[1] of DNA – the gene’s building-block \u2013 is used for a wide range of genetic research and clinical applications today. In the future, DNA sequencing, along with DNA synthesis\/replication and encapsulation, can potentially address enormous non-medical applications like data storage, compute, cryptography, agriculture and other industrial applications. Illumina\u2019s genetic research and clinical medical applications include genetic and infectious diseases, drug discovery, reproductive health, oncology, research\/applied genomics, and multi-omics[2].<\/span><\/p>\n

Illumina\u2019s annual revenues stand at $4.5 billion, grew at an 11% CAGR from over the last five fiscal years, with gross margins of 69% to 71% and $4.2 billion in accumulated operating cash flow. Illumina\u2019s next generation sequencing {NGS} market is expected to double over the next five years, growing at a 15.7% CAGR. NGS\u2019 improving throughput and subsequent lower genome sequencing costs are leading to rising demand for the detection of diseases such as cancer as well as national health studies.<\/span><\/p>\n

The company has two key competitive advantages. The first is the scalability of its DNA sequencing platform. The company\u2019s proprietary sequencing by synthesis {SBS} tracks the addition of labeled nucleotides as the DNA chain is copied in a massively parallel fashion. The scalability of SBS enables the sequencing of more than 20,000 human genomes per year. The recently launched NovaSeq X production-scale sequencing systems can read a human genome for as little as $200, much lower than 2022 levels.<\/p>\n

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\"Cost<\/span>
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NIH<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The second advantage is a highly integrated and scalable system that provides a lower cost of ownership to customers. Illumina provides critical operational support for customers\u2019 sample preparation, instrument control\/management, and post-run analysis, providing benefits such as end-to-end workflows, lower data compression losses, lower storage and compute costs, etc. Once customers are integrated into Illumina\u2019s informatics suite, bio-IT platform, and connected analytics, they tend to stay. Furthermore, Illumina is the cornerstone of the broader sequencing \/ multi-omics ecosystem.<\/p>\n

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\"multi-omic<\/span>
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Illumina<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Illumina has an attractive business with growing recurring revenues and economies of scale. Instrument sales accounted for 18% of Q2 2023 core sequencing revenues, the remainder comes from higher-margin consumables and services. Each new instrument sold creates a recurring, higher-margin revenue stream of consumables and services. Secondly, as previously mentioned, as sequencing costs fall, demand increases due to the plethora of new applications that can now be feasibly addressed. Illumina has disproportionately benefited from lower genome costs by keeping its clients\u2019 total cost of ownership below that of its competitors.<\/p>\n

In some ways<\/strong>, Illumina can be compared to Nvidia (NVDA). Just like Nvidia, Illumina has a dominant market share in a fast-growing market. Nvidia\u2019s CUDA proprietary computing platform locks in developers into its GPU hardware; the same type of competitive moat that Illumina\u2019s informatics, bio-IT and analytics provides to its users. Some startups are claiming to have faster GPUs than Nvidia, just like some upstarts claim to have lower sequencing costs per gigabase than Illumina. But it does not matter, as long as Nvidia and Illumina are in the same ballpark, their support ecosystems provide the competitive moat including lower total cost of ownership that retains customers. I know this firsthand from Illumina customer visits.<\/p>\n

Nvidia\u2019s top-line growth rate is expected to accelerate substantially in 2023 led by generative AI, resulting in a 194% year-to-date jump in the NVDA stock price, with EV\/LTM revenues of 32.3x. Currently priced at $119.47, ILMN stock is down 41% year-to-date and 77% from its August 2021 peak, with EV\/LTM revenues of 4.6x (well below its last-five-year average of 13.3x).<\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Illumina\u2019s weak stock market action can be attributed to several factors including 1) product timing transition while NovaSeq X ramps up, 2) dwindling COVID test revenues, 3) China difficulties, 4) possible competitive worries, 5) macro-economic conditions, and last but not least, 6) punitive regulatory steps from Illumina\u2019s re-acquisition of its stake in Grail that it did not already own.<\/p>\n

The NovaSeq X product launch started in earnest in Q1 of 2023, with production capacity ramping over the 2023-2024 period. In the interim, several customers are postponing orders from the previous production-sale sequencers \u2013 NovaSeq 6000, and waiting for the more-efficient NovaSeq X series. Secondly, COVID surveillance program revenues shrank to $6M in Q2 2023 versus $27M in the year-ago quarter. Third, China is taking various measures to supplant Illumina DNA sequencers with domestic alternatives, notably low-cost sequencers from BGI Genomics (SZSE:300676). This demand slowdown is limited to China, which is about 10% of total revenues. The China slowdown is limited to mid-to-low throughput sequencers, albeit being the majority of the volume.<\/p>\n

Fourthly, competition comes from larger longstanding companies like Thermo Fischer Scientific (TMO), Qiagen N.V. (QGEN), and BGI\/Complete Genomics, as well as smaller players and startups like Pacific Biosciences (PACB), Oxford Nanopore (LSE:ONT), Singular Genomics (OMIC), Element Biosciences, and Ultima Genomics, some of which are in Illumina\u2019s hometown of San Diego, CA. As some of Illumina\u2019s sequencing patents are expiring, some competitors have tried to incorporate its SBS sequencing methodology, notably in the mid-throughput category. In addition, the EU has even revoked a few key Illumina patents in 2019. Still, Illumina has more than adequate patent protection with 9,178 patents, including the defense of its proprietary support tools.<\/p>\n

Side-by-side industry comparisons of NGS mid-throughput sequencers (the majority of Illumina sequencing revenues today) and NGS high-throughput sequencers are shown below. The key is that Illumina is in the ballpark on various metrics, and then wins on lower total cost of ownership through its integrated support tools.<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
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NGS Mid-Throughput DNA Sequencers<\/strong><\/p>\n<\/td>\n<\/tr>\n

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Measurement<\/p>\n<\/td>\n

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Illumina<\/p>\n

NextSeq 550<\/p>\n<\/td>\n

\n

Illumina<\/p>\n

NextSeq 1k\/2k<\/p>\n<\/td>\n

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Element Bio<\/p>\n

Aviti<\/p>\n<\/td>\n

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Singular<\/p>\n

G4 F2 Flow-Cell<\/p>\n<\/td>\n

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Pacific Bio<\/p>\n

Onso<\/p>\n<\/td>\n<\/tr>\n

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Run Time (hour)<\/p>\n<\/td>\n

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30<\/p>\n<\/td>\n

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48<\/p>\n<\/td>\n

\n

48<\/p>\n<\/td>\n

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19<\/p>\n<\/td>\n

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48<\/p>\n<\/td>\n<\/tr>\n

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Max Output Run (gb)<\/p>\n<\/td>\n

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120<\/p>\n<\/td>\n

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360<\/p>\n<\/td>\n

\n

600<\/p>\n<\/td>\n

\n

200<\/p>\n<\/td>\n

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150<\/p>\n<\/td>\n<\/tr>\n

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Max Reads Paired Ends (m)<\/p>\n<\/td>\n

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400<\/p>\n<\/td>\n

\n

2,400<\/p>\n<\/td>\n

\n

2,000<\/p>\n<\/td>\n

\n

660<\/p>\n<\/td>\n

\n

500<\/p>\n<\/td>\n<\/tr>\n

\n

Max Read Length<\/p>\n<\/td>\n

\n

2×150<\/p>\n<\/td>\n

\n

2×150<\/p>\n<\/td>\n

\n

2×150<\/p>\n<\/td>\n

\n

2×150<\/p>\n<\/td>\n

\n

2×150<\/p>\n<\/td>\n<\/tr>\n

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Flow Cell\/Run<\/p>\n<\/td>\n

\n

1<\/p>\n<\/td>\n

\n

1<\/p>\n<\/td>\n

\n

2<\/p>\n<\/td>\n

\n

4<\/p>\n<\/td>\n

\n

NA<\/p>\n<\/td>\n<\/tr>\n

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Daily Max Output (gb)<\/p>\n<\/td>\n

\n

96<\/p>\n<\/td>\n

\n

180<\/p>\n<\/td>\n

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300<\/p>\n<\/td>\n

\n

253<\/p>\n<\/td>\n

\n

75<\/p>\n<\/td>\n<\/tr>\n

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Accuracy#<\/p>\n<\/td>\n

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>85%<\/p>\n<\/td>\n

\n

>85%<\/p>\n<\/td>\n

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>90%<\/p>\n<\/td>\n

\n

75% – 90%<\/p>\n<\/td>\n

\n

>90%<\/p>\n<\/td>\n<\/tr>\n

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Instrument Price<\/p>\n<\/td>\n

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$275,000<\/p>\n<\/td>\n

\n

$335,000<\/p>\n<\/td>\n

\n

$289,000<\/p>\n<\/td>\n

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$350,000<\/p>\n<\/td>\n

\n

$259,000<\/p>\n<\/td>\n<\/tr>\n

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Best price per Gigabit<\/p>\n<\/td>\n

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$41<\/p>\n<\/td>\n

\n

$17<\/p>\n<\/td>\n

\n

$2<\/p>\n<\/td>\n

\n

$9<\/p>\n<\/td>\n

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$15<\/p>\n<\/td>\n<\/tr>\n

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# Assumes a Quality Score of Q30 (99.9% accuracy of base call) except Pacific Bio with Q40 (99.99% accuracy)<\/p>\n<\/td>\n<\/tr>\n

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Source: Company Data, UBS\u00b8 Biocompare<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

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