JasonDoiy
The following segment was excerpted from this fund letter.
Illumina (NASDAQ:ILMN)
Illumina has 90% market share in the key technology platform known as gene sequencing that enables a wide range of genetic research and clinical applications. You can learn more about our full thesis on the company here.
The company sells some of their equipment into China, where COVID related shutdowns is temporarily impacting sales. However, we don’t believe that China, or any country around the globe, has any intention of backing away from the long-term opportunity to use genetic research and applications to radically improve human health. For instance, the novel MRNA vaccines developed for COVID (the virus was sequenced on Illumina equipment) have demonstrated a broad new class of vaccines for development while at the same time major strides are being made in combatting cancer using genetic testing.
Illumina did lose a court battle this year related to some of their patents, but we do not think their competitive advantages and growth opportunity rests primarily on a couple patents. In a recent interview, a former executive of the company, now working for a different life sciences company said, “It’s going to make business for Illumina a little bit more difficult. But there’s such a big, big installed base of Illumina’s NovaSeqs across a lot of these companies that it’s going to take a while to have anybody kind of displace what’s there.”
Meanwhile Illumina announced back in January that they would be launching a new series of breakthrough products to reduce costs and enhance output, about which the former employee said, “The company has known that their patents are expiring for a while, so you know they’re sitting on something, right? Just waiting for the right time. But the NovaSeq has such a huge installed base with a lot of big labs that I don’t see anybody switching those out anytime soon because the switching costs are just so flipping high.”
So, while Illumina does face some headwinds, we believe that investors are radically overreacting in selling the stock down to such low levels. Relative to the amount of revenue they generate, the stock is now the cheapest it has been since 2013, prior to the company’s emergence as the dominant incumbent. If you separate Illumina’s core business from the early-stage cancer detection business called GRAIL that they acquired last year you’ll find that relative to earnings, Illumina has never been so cheap. In fact, the last time Illumina traded at today’s share price was in 2017, when its revenue was more than 40% lower, and it did not own the cancer detecting GRAIL business whose purchase price now make up over a quarter of Illumina’s market value.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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