NovaSeq X And Multiomics Will Reshape Sequencing Workflow

Key Takeaways

• The divestment of GRAIL enables Illumina to focus on its core business, potentially improving operating efficiencies and margins.
  
• Illumina's innovations and collaborations aim to boost sequencing volume and reduce costs, targeting significant revenue growth by diversifying and optimizing workflows.
  
• Heavy reliance on China revenue and the NovaSeq X transition, amid competitive pressures, poses risks to earnings and market share growth.

Catalysts

Provides sequencing- and array-based solutions for genetic and genomic analysis in the Americas, Europe, Greater China, the Asia Pacific, the Middle East, and Africa.

• The divestment of GRAIL allows Illumina to focus more resources on its core business, potentially leading to improved operating efficiencies and net margins as they streamline and focus on their primary competencies.
  
• Illumina's strategy includes returning to revenue growth in 2025, targeting high single-digit revenue growth by 2027, which is driven by innovations in the sequencing workflow to reduce end-to-end costs. This could enhance revenue projections if the strategy is successful.
  
• The introduction of new sequencing instruments like the NovaSeq X and collaborations with companies like NVIDIA to enhance data analysis suggest potential growth in sequencing volumes and revenue from consumables as these instruments gain market traction.
  
• Operational excellence initiatives, including improving manufacturing efficiencies and reducing costs, are projected to result in more than $100 million in cost savings in 2024. These efforts are aimed at improving operating margins and ultimately boosting earnings growth.
  
• Illumina is expanding its presence in multiomics and plans to enhance its data and services offerings. This diversifying strategy could tap into broader markets, supporting continued revenue and earnings growth, assuming successful implementation and market adoption.

Illumina Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Illumina compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Illumina's revenue will decrease by 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -22.3% today to 18.5% in 3 years time.
• The bearish analysts expect earnings to reach $817.2 million (and earnings per share of $5.22) by about July 2028, up from $-966.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from -17.5x today. This future PE is lower than the current PE for the US Life Sciences industry at 38.6x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Illumina Future Earnings Per Share Growth

Risks

• The announcement from the Chinese Ministry of Commerce, which includes Illumina, could pose significant risks to their revenue from China, which accounts for approximately 7% of global revenue. Any disruptions could impact overall earnings growth.
  
• Illumina is heavily reliant on transitioning customers to their new NovaSeq X series. Any issues or delays in this transition could affect revenue growth predictions and their ability to achieve targeted earnings growth.
  
• The competitive landscape remains challenging, with other companies aggressively pursuing significant genomic sequencing contracts, potentially impacting Illumina's market share and future revenue growth.
  
• Illumina's assumptions for stable macroeconomic and political environments may not hold, particularly amid evolving research funding scenarios in Washington, which could impact revenues and operating margins.
  
• High R&D expenditures, although necessary for innovation, may continue to pressure net margins if revenue growth does not meet expectations, affecting overall profitability and earnings.

Valuation

• The assumed bearish price target for Illumina is $70.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Illumina's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $185.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $817.2 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $106.72, the bearish analyst price target of $70.0 is 52.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.