Illumina Stock Upgraded: What You Need to Know

By Rich Smith Markets Fool.com

It's been a busy week for owners of Illumina (NASDAQ: ILMN) stock -- and it's only Tuesday. As explained in a series of reports from TheFly.com, Illumina appeared at the JPMorgan Healthcare Conference yesterday, where it announced:

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  • New guidance indicating that it will report $619 million in sales for Q4 2016 (analysts are still looking for $610 million)
  • The launch of a "single-cell" gene sequencing solution in cooperation with Bio-Rad Labs (NYSE: BIO)
  • A new partnership with IBM (NYSE: IBM) to integrate IBM's Watson artificial intelligence supercomputer with Illumina's own BaseSpace Sequence Hub and tumor sequencing process
  • A separate partnership with Phillips (NYSE: PHG) aimed at large-scale analysis of genetic variation and function
  • A new NovaSeq Series scalable sequencing architecture, to replace its HiSeq architecture dating from 2010, which the company predicts will "one day" permit gene sequencing for just $100

Big news on several fronts. Today, Illumina is reaping its reward in the form of a series of price target hikes from the likes of Leerink and Piper Jaffray -- and scoring a big upgrade to "buy" from Bank of America/Merrill Lynch.

Here are three things you need to know.


Gattaca: For Illumina, it's more than a movie; it's a business model. Image source: Getty Images.

1. Up 15% -- and heading higher?

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Illumina stock is already up 15% today on the news, but according to Bank of America's Merrill Lynch brokerage unit, it could be headed higher. Priced at $163 after today's surge in stock price, Merrill thinks Illumina stock won't stop running before it hits $175 a share -- a gain of 7% more.

Of course, even if Merrill Lynch is right, this means that two-thirds of the potential gains have already been priced into Illumina's stock.

2. Is it too late to buy?

Once that realization sinks in, many investors may decide that even if Merrill Lynch is right, it is now too late to buy Illumina stock. In fact, Leerink seems to have already come to this conclusion.

As TheFly reports, Illumina is planning to sell its new sequencers for anywhere from $850,000 to $985,000 per unit, with shipments to begin in March. But while Leerink praises the introduction of NovaSeq as "meaningful," the analyst also warns that the gene sequencing market is still oversupplied with more machines than its end users can absorb. Leerink grudgingly raised its price target back to $132 this morning (the analyst had just finished cutting its price target less than a month ago), but even so, with Illumina stock selling for nearly $164 a share already, Leerink sees little prospect for further gains in share price -- rather, the opposite.

3. Even Merrill may have second thoughts

For that matter, I wouldn't be too awfully surprised if even Merrill Lynch begins rethinking its endorsement of Illumina stock in rather short order -- given how quickly the market has already reacted to its upgrade, and to Illumina's own announcements. Yes, the partnerships with Phillips, IBM, and Bio-Rad are important. Yes, the introduction of new products is also a revenue driver. But as Merrill explains in a write-up (reported on StreetInsider.com this morning), Illumina's real prize is the oncology market, and Merrill doesn't see NovaSeq as cracking that open for Illumina just yet.

Ultimately, Merrill would love to see cancer doctors using Illumina's products, and the gene sequencing data they provide, to treat individual cancer patients. But in the meantime, Merrill will be satisfied if the company simply grows its revenue through "the increasing prevalence of precision medicine and use of sequencing by pharmaceutical companies, large scale population studies (including GRAIL), and an emphasis on bioinformatics."

The most important thing: Valuation

So what kind of growth rates are we looking at here? According to estimates posted on S&P Global Market Intelligence, most analysts still see Illumina growing at no more than 10% annualized over the next five years, and earning $3.27 per share this year, and perhaps $3.77 the year after that.

Those are nice numbers to be sure -- but they still leave Illumina stock trading for a current-year price-to-earnings ratio of 50, which seems a bit pricey for a stock growing at 10%. Meanwhile, the $619 million revenue estimate that Illumina provided yesterday, while ahead of estimates, still works out to a growth rate of only 5% when compared to Q4 2015 revenue, so even the 10% growth rate isn't set in stone.

Long story short? Illumina has a great story. It's a story that's getting a lot of investors -- and analysts -- excited. But at these prices, maybe it's time they all curbed their enthusiasm a bit.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 358 out of more than 75,000 rated members.The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.