Gene Sequencing

Illumina (ILMN) is currently one of the hottest stocks in the stock market. ILMN has gone from $50 to $150 during the past year. Check that, the stock’s $180 now. The company makes gene sequencing systems, which determines the DNA of an organism.

In January, Illumina’s CEO talked about its products at the JP Morgan Healthcare Conference. The key takes were:

• The company’s high-end product HiSeq is getting updated to HiSeq X, which has 6x the scanning speed of the current model and will sequence five genomes per day instead of the current one. These units cost $10 million and buyers will need to buy ten each. That’s $100 million in revenue. ILMN did $1.4 billion in revenue last year.
• The company’s new low-end product NextSeq, which runs just $250,000, will be as powerful as the old HiSeq line.

The cost of sequencing a genome has come crashing down: from $100 million in 2001 to $100,000 by $2009 and will now be $1000 with the HiSeq X.

One Year Chart

The trouble is everyone has not hyped up this stock and ILMN is expensive. This data is from Feb 7th (2014 Q1). Note the profits at the bottom haven’t been great, yet the stock is soaring — with a P/E of 73. Keep in mind this is from a couple of weeks ago when ILMN was $150. Today its $180.

I really thought annual profits estimates would skyrocket after the JP Morgan conference. They didn’t. This company is not growing profits or sales like a top-notch growth stock. 2014 profits are set to grow 14% year-over-year, sales 18%. And I have to pay over 73x earnings?

Fair Value

I don’t know what to value this company at. 35 times earnings? Maybe I’ll take the P/E up next quarter, but still ILMN seems sky-high. Look at that one-year chart, looks like ILMN went parabolic (a danger sign for things to come).

Sharek’s Take

This is a GREAT company doing revolutionary things in healthcare — Illumina is clearly the leader in gene sequencing. The problem is the stock’s valuation is high and the chart shows a stock that is probably due for a fall. I’m not buying in at this price, and I’ll probably regret this decision years from now.