Illumina has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 14.6% to $98.50 per share while the index has gained 15.5%.

Is now the time to buy Illumina, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Illumina Will Underperform?

We don't have much confidence in Illumina. Here are three reasons we avoid ILMN and a stock we'd rather own.

1. Declining Constant Currency Revenue, Demand Takes a Hit

In addition to reported revenue, constant currency revenue is a useful data point for analyzing Genomics & Sequencing companies. This metric excludes currency movements, which are outside of Illumina’s control and are not indicative of underlying demand.

Over the last two years, Illumina’s constant currency revenue averaged 2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Illumina might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Illumina, its EPS declined by 6.3% annually over the last five years while its revenue grew by 5%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Illumina’s five-year average ROIC was negative 0.5%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.

Final Judgment

We cheer for all companies helping people live better, but in the case of Illumina, we’ll be cheering from the sidelines. That said, the stock currently trades at 22.2× forward P/E (or $98.50 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.

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