Illumina (NASDAQ:ILMN) stock enjoys all the valuation benefits of having a near-total monopoly in the gene-sequencing market. Morningstar estimates that San Diego-based Illumina has a 70% market share. Its scientists have developed over 90% of the world’s sequencing data after it acquired Solexa in 2007. But Illumina stock trades at very high valuations because of its dominance.
Wired magazine recently published a very interesting story about Illumina. It discusses how Illumina helped the parents of a young child with a rare and undiagnosed disease. The article really opens your eyes to the practical aspects of what DNA sequencing is all about.
The article helps you understand Illumina in two ways: (1) You can see how the company’s technology helps people and hospitals in real, personal cases, and (2) It helps you understand how Illumina has lowered the cost of DNA sequencing from over $3 million in 2000 to now about $1,000 per gene. Illumina’s CEO hopes to lower the cost down to about $100 per gene.
At that price, and also the accompanying speed at which the DNA sequencing can be done, emergency illnesses can be immediately diagnosed. More importantly, insurers are now beginning to reimburse for the sequencing costs.
Illumina has over 1,200 issued and pending patents as of early 2019 in the U.S. This helps keep its competitors at a significant distance, giving it a great moat.
Illumina Stock Benefits Greatly From Its Cash Flow
During its third-quarter report, Illumina announced a 6% year-over-year increase in revenues to $907 million. But for the past 12 months, revenue grew only 1.6% to $3.6 billion.
Illumina’s Q3 net income was up 17.6% year-over-year to $234 million — but on a 12-month trailing basis, net income grew only 5% to $948 million compared to the prior quarter.
More importantly, Illumina’s free cash flow fell 4.4% year-over-year to $218 million. That’s down 1.4% on a 12-month basis to $691 million from the prior quarter.
So growth is slowing. But investors are still paying a high price for that growth.
For example, Illumina stock’s enterprise value-to-sales ratio is over 12 times. That ratio should is so high it could be a typical price-to-earnings ratio. And on that note, ILMN stock’s P/E ratio is also sky high.
The market values Illumina stock’s net income at over 42 times. Here is what that means. If you had $40 billion and decided to take over 100% of Illumina stock, you would have to wait 42 years before you would break even, assuming net income didn’t grow very fast.
But I have already shown that net income only grew 5%.
More importantly, the free cash flow yield value for Illumina stock is 1.7%. That means it will take an investor 58.8 years to recoup his investment if free cash flow does not grow.
The Bottom Line on ILMN Stock
It’s nice that Illumina provides so much value in the medical field by lowering the cost of DNA sequencing. And it’s nice that there is very little competition. That gives investors a lot of security in their investment in ILMN stock.
But you pay a very high price for that security. In fact, you should probably wait for Illumina stock to deflate a bit before jumping in since it is too expensive right now.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks, which includes both dividend and buyback yields. In addition, subscribers a two-week free trial.