In a late April article, we cautioned investors that, with a stratospheric price-to-earnings ratio of more than 80, genetic analysis instrument maker Illumina (Nasdaq:ILMN) might be riding a bit high in the water. That certainly proved to be the case. Shares of the company sunk about 30% on Friday after Illumina revealed late Thursday that its third-quarter revenue would fall well short of Wall Street estimates.
As high as $75 at the end of July, the San Diego company’s stock has been on a slippery slope since then, sliding all the way to below $28. Of course, in every cloud there’s a silver lining. In Illumina’s case, the stock now trades at a much more reasonable P/E of 30, a small consolation to investors who got in at or near the high — but perhaps an opportunity for others.
In announcing the third-quarter shortfall and suspending full-year guidance, management pointed to a substantial slowdown in orders from federal agencies. Other factors cited include:
– Continued uncertainty surrounding research-funding levels in the U.S. and Europe
– The second-quarter launch of a product that created excess capacity its customers were unable to fully utilize
– A significant drop in the use of certain products by customers using its Genome Analyzer, and
– Lower-than-expected upgrades by users of that system to its HiSeq 2000 systems.
“Clearly, we are highly disappointed with our revenue for the third quarter,” said President and CEO Jay Flatley, according to the Associated Press. He called the slowdown in new purchases “unprecedented,” and said it resulted from uncertainties in research funding and overall economic conditions.
“We expect these conditions to continue through at least the fourth quarter, while the 2012 – 2013 U.S. budgets for National Institutes of Health and other related agencies are determined,” Flatley added.
The company believes that revenue for the fourth quarter will be higher than the third quarter, but it suspended its previous guidance for a revenue increase of 24% to 26%, implying annual revenue between $1.12 billion and $1.14 billion. Wall Street was expecting full-year revenue of $1.14 billion, with estimates ranging from $1.12 billion to $1.17 billion.
Illumina’s announcement seems to be having a ripple effect in the industry. Competitors Affymetrix (Nasdaq:AFFX) and Life Technologies (Nasdaq:LIFE) also get 20-40% of their revenue from U.S. government-backed research, and a budget squeeze is likely to affect their performances, too. That’s probably the reason their shares are down 5% and 6%, respectively, this morning.
Back in April, we noted that one analyst likened Illumina to Apple (Nasdaq:AAPL) for the company’s ability to replace its products before they become stale. It looks like that assessment might have been somewhat premature.