For many companies, a sales-growth expectation of 12% in any given year would be cause for celebration. For genetic-sequencing outfit Illumina, Inc. (ILMN), such a rate is a relative disappointment for investors accustomed to much bigger numbers. The end result? Illumina stock is down a whopping 25% as of Tuesday’s afternoon trading.
Then again, ILMN was primed for a pullback regardless of the company’s outlook … and not a small one either. The stock rallied 35% from a major technical support line encountered in February (after selling off in December and January), leaving it ripe for profit-taking.
Moreover, on Monday — before reporting last quarter’s preliminary revenue outlook — Illumina stock was bumping into an established resistance line.
But even with Tuesday’s hefty pullback, there’s room and reason for ILMN to keep pulling back. Fortunately, there’s a key technical floor in place. It just remains to be seen if the bulls will choose to see it.
Illumina Slowing Down
Illumina’s downswing was at least suspected, but the company confirmed it Monday evening — its growth rate is slowing down. Shares of ILMN are now off more than 40% from their July peak, and have made a steady string of lower highs leading up to Tuesday’s huge selloff.
It wasn’t an official SEC filing, either. Rather, it was preliminary revenue and outlook figures, sans any perspective on earnings, that was enough to spook the market all the same. For its first quarter of the year, Illumina anticipates reporting a top line of $572 million, falling $14 million short of analyst expectations, and only up 6% from the same quarter last year.
Click to Enlarge It was also the first time in 15 quarters the company did not post double-digit year-over-year growth.
“Our first-quarter results fell short of expectations largely due to lower than expected sales of HiSeq 2500, 3000 and 4000 instruments. Despite this slow start in Q1, we anticipate that our Americas and Asia Pacific regions will meet our expectations for the full year but that Europe will underperform. As a result, we now project approximately 12% revenue growth for fiscal 2016.”
This slowdown has actually been underway for a while, however. Analysts expecting a rekindling of the glory days from 2013 and 2014 are now forced to rethink their thesis.
ILMN Was Doomed Anyway
As was noted, odds were good ILMN shares were going to peel back regardless of the numbers offered in Monday’s outlook. The stock was already touching a key technical resistance level (dashed), and just as it did in December, it only took a modest move above the 200-day moving average line (green) to pull the rug out from underneath the stock.
Click to Enlarge There is a bastion of hope here in the shadow of Tuesday’s selloff, however. The $130 level marks the low point of several pullbacks since early 2014. Odds are decent that it could still act as support, especially with today’s huge bearish gap apt to start drawing the stock higher.
The proverbial fly in the ointment is the Illumina’s valuation.
When revenue and earnings growth are soaring, traders think nothing of buying a stock trading at 40 or even 50 times earnings. Once that growth rate slumps to single-digits, though, as does palatable price-earnings levels. This is where Illumina could find trouble.
As of today, Illumina stock is trading at 43 times trailing earnings and 31 times future earnings. Even at a price of $130, ILMN shares would be valued around 42 and 30 times earnings, respectively. That’s still too much for a company posting single-digit growth.
Bottom Line for Illumina Stock
Today’s sharp pullback from ILMN is painful, but it may also have already set up a similarly strong gap-filling rally. Don’t be lured in by such a move, as it’s not likely to last.
At best, the stock would do well to revisit what’s now become an intermediate-term resistance line. After that, the bears should growl again. There’s not a lot of reason to expect a stellar fundamental performance from here.
Conversely, though, it doesn’t solve the valuation problem, we have to give the benefit of the doubt to Illumina finding support at $130. If that floor does end up breaking though, there’s no other floor in sight.
At that point, it becomes a valuation issue rather than a technical one, and there’s no telling how low the stock could go before the market finds a valuation it’s comfortable with.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
