Illumina Inc. (ILMN) — Great Value Stock Being Offered Considerable Discount During Market Downturn

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Key points

  • Illumina Inc. operates in the genomic diagnostics industry and is planning to expand its operation into new markets, representing a significant future growth opportunity.
  • The fair value price for ILMN is around $390/share based on DCF analysis and it currently trades at around $220/share.
  • This represents a great opportunity for investors to scale into a value growth stock poised to recover quickly after the market recovers.

Investment Thesis

With the recent downward correction in the market, the stock price of ILMN has dropped below its fair value price of $390 per share. This represents a great opportunity for value investors to scale into a company over the next few months to reap profits after the market recovers.

Background

Illumina Inc. is a biotechnology company that engages in the production of genomic diagnostic equipment. With applications of genome analysis in life sciences, health care, and microbiology, ILMN anticipates the growth of its business in oncology, reproductive health, genetic disease, and research labs. These industries represent more than $50 billion in market opportunities, which bodes well for the future revenues and stock price.

Company Fundamentals

ILMN balance sheet for the past 5 years is shown below. It has maintained a relatively steady cash position at $1.2 Billion both in 2018 and 2022. The current cash flow is lower than January 2020 peak at $2.0 billion, indicating cash contraction. The total assets have nearly tripled during that same period from $5.257 Billion in 2018 to $15.217 Billion in 2022. The share holder’s equity has more than tripled from $2.97 Billion in 2018 to $10.7 Billion in 2022.

ILMN Balance Sheet — Past 5 Years

Looking at the company income statement shown below, we see that the company revenues have steadily increased from $2.8 billion in 2018 to $4.5 billion in 2022. However, the company’s EBITDA has decreased considerably from $764 million in 2018 to $216 million in 2022. The company has also ceased expenditure on Research and Development in 2022, indicating stagnating future growth prospects.

ILMN Company Income Statement — Past 5 Years

Company Valuation

In 2021, ILMN had nearly 40% revenue growth, however, according to the company management, the future anticipated growth is in the mid-teens (around 15%). Additionally, the company anticipates a Non-GAAP operating margin of 27.5% in the future. Modeling the company cash flows using a discounted cash flow model, we see that the stock price has a 76.8% upside, at a price of $390. Since this analysis is primarily based on company fundamentals, we can see that ILMN is currently undervalued by the market.

ILMN Fair Value Price
ILMN Revenue Forecast

Investment Risks

It is interesting to see why ILMN stock price has lost value the recent months. The overall market is in correction territory and most stocks have been hampered by the recent monetary and economic contraction. When we re-run the analysis using the PE multiples, we can see that ILMN may still have some downside left. If ILMN contracts to the lower end of the Trailing P/E multiples for the sector of around 29.45 times and profits reduce to last year’s level of $761 million, its share price would reduce to $142.67 share. However, if the market recovers and ILMN profits accelerate to $2.72 billion, then it will likely approach its Forward P/E multiples 25.2 times and the stock price may increase to $436.79. At the current share price of around $220 per share, investors may be able to dollar cost average into their full investment size over the next few months before the fundamentals reassert themselves and the stock price rallies higher.

ILMN Fair Price Using Sector Analysis — PE Multiples

Conclusion

The downside risks of ILMN at a price of $220/share are lower than the future upside potential of the stock. In the recent market downturn, this presents a great opportunity for value investors scale into the stock and reap the benefits during the next business cycle.