Illumina's Plunge: A Buying Opportunity or a Risk to Your Portfolio?
As the stock market continues to experience its share of ups and downs, Illumina has been at the forefront of this volatility. With a 30.9% drop in just six months, investors are left wondering whether there's a buying opportunity on the horizon or if it poses a significant risk to their portfolio.
Our expert analysts have taken an in-depth look at Illumina's recent performance and provide a comprehensive breakdown of its prospects. Whether you're a seasoned investor or just starting out, this analysis will give you a clear understanding of why we think Illumina is not currently the best investment opportunity.
The Decline of Constant Currency Revenue: A Cause for Concern
One key metric that investors interested in Genomics & Sequencing companies should track closely is constant currency revenue. This measure excludes currency movements, which can be outside of a company's control and do not accurately reflect underlying demand. Over the last two years, Illumina's constant currency revenue has averaged 2% year-on-year declines.
This performance is underwhelming for several reasons. Firstly, it implies that there may be increasing competition or market saturation in the Genomics & Sequencing space. As a result, Illumina might have to lower its prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. Additionally, this trend suggests that the company's revenue growth is not sustainable and could lead to further declines in the future.
Earnings Per Share: A Mixed Bag for Investors
When evaluating a company's performance over time, tracking the long-term change in earnings per share (EPS) is crucial. It highlights whether a company's growth is profitable or if it's just growing numbers without necessarily increasing its bottom line. Unfortunately for Illumina, its EPS has declined by 8.8% annually over the last five years while its revenue grew by 4.1%. This tells us that the company became less profitable on a per-share basis as it expanded.
This trend is concerning because it implies that Illumina's growth has come at the cost of profitability. As investors, we want to see companies that can grow their revenues and increase their earnings simultaneously. If a company cannot achieve this balance, it may indicate deeper issues with its business model or management.
Free Cash Flow Margin: A Red Flag for Investors
Another important metric that often flies under the radar is free cash flow margin. This measure accounts for all operating and capital expenses, making it a more comprehensive indicator of a company's financial health than traditional metrics like net income or gross profit margins. Illumina's free cash flow margin has dropped by 11.4 percentage points over the last five years.
While the company's margin may have ticked higher in recent periods, shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal higher capital intensity and investment needs for Illumina. This would be a concerning development, as it would indicate that the company is not generating enough cash from its operations to fund its growth initiatives.
The Verdict: Illumina Doesn't Pass Our Quality Test
After considering these factors, we believe that Illumina doesn't pass our quality test. With a forward price-to-earnings ratio of 19.1× and a current stock price of $84.65 per share, there's already a lot of good news priced in. At this valuation, we think investors can find better investment opportunities elsewhere.
In fact, one of our top software and edge computing picks offers more promising prospects for growth and profitability. We'd recommend taking a closer look at this company instead of pouring money into Illumina.
Conclusion
Illumina's recent performance has been disappointing, to say the least. With declining constant currency revenue, trending down EPS, and a free cash flow margin drop, we think it's time to reevaluate our investment in this company. While there may be some who believe that now is the perfect time to buy Illumina at its lower price point, we're not convinced.
We'd like to see more evidence of sustainable growth and profitability before investing in Illumina. Until then, we'll continue to monitor the market and provide updates on our top picks for growth and profitability. If you're interested in learning more about our investment strategies or finding your next big winner, be sure to check out our Top 6 Stocks list, which has generated a market-beating return of 175% over the last five years.
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