Illumina, Inc.'s (NASDAQ:ILMN) Price Is Out Of Tune With Revenues

Illumina, Inc.'s (NASDAQ:ILMN) price-to-sales (or "P/S") ratio of 4.9x may not look like an appealing investment opportunity when you consider close to half the companies in the Life Sciences industry in the United States have P/S ratios below 3.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Illumina

What Does Illumina's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Illumina's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Keen to find out how analysts think Illumina's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Illumina's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Illumina's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 4.2% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 6.6% each year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Illumina's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that Illumina currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Illumina with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.