Illumina (ILMN)

Genomics company Illumina (NASDAQ:ILMN) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 1.4% year on year to $1.04 billion. Its non-GAAP profit of $0.97 per share was 3.2% above analysts’ consensus estimates.

Company Overview

Pioneering the ability to read the human genome at unprecedented speed and affordability, Illumina (NASDAQ:ILMN) develops and sells advanced DNA sequencing and microarray technologies that allow researchers and clinicians to analyze genetic variations and functions.

Genomics and sequencing companies within the life sciences industry provide the technology for increasingly personalized medicine, drug discovery, and disease research. These firms leverage cutting-edge platforms for high-throughput sequencing and genomic analysis, enabling researchers and healthcare providers to better understand genetic underpinnings of diseases. While the industry enjoys high barriers to entry due to proprietary technology and intellectual property, the business model also faces significant R&D costs, reliance on continued innovation, and exposure to shifts in academic, biotech, and clinical research funding. Over the next few years, the subsector is well-positioned to benefit from tailwinds such as increasing adoption of precision medicine, expanded applications for sequencing technologies in areas like oncology and rare disease diagnostics, and growing use of genomic data in drug development. Advances in artificial intelligence could further enhance the speed and accuracy of genomic insights. However, potential headwinds include price sensitivity among research institutions and healthcare systems that are constantly trying to contain and lower costs. Additionally, regulations around data privacy and genomic testing are not yet set in stone, adding uncertainty to the industry.

Illumina's main competitors include Thermo Fisher Scientific (NYSE:TMO) with its Ion Torrent sequencing platform, Pacific Biosciences (NASDAQ:PACB) specializing in long-read sequencing technology, and Oxford Nanopore Technologies (LSE:ONT) known for its portable sequencing devices. The company also faces competition from emerging players like Element Biosciences and BGI Genomics (SHE:300676).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $4.32 billion in revenue over the past 12 months, Illumina has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Illumina grew its sales at a tepid 4% compounded annual growth rate. This was below our standard for the healthcare sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Illumina’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1% annually.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Illumina’s organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Illumina’s revenue fell by 1.4% year on year to $1.04 billion but beat Wall Street’s estimates by 0.5%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.

Illumina has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average adjusted operating margin of 22.2%.

Analyzing the trend in its profitability, Illumina’s adjusted operating margin decreased by 2.4 percentage points over the last five years. A silver lining is that on a two-year basis, its margin has stabilized. Still, shareholders will want to see Illumina become more profitable in the future.

This quarter, Illumina generated an adjusted operating profit margin of 20.4%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Illumina, its EPS declined by 8.9% annually over the last five years while its revenue grew by 4%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Illumina’s earnings can give us a better understanding of its performance. As we mentioned earlier, Illumina’s adjusted operating margin was flat this quarter but declined by 2.4 percentage points over the last five years. Its share count also grew by 7.4%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Illumina reported EPS at $0.97, in line with the same quarter last year. This print beat analysts’ estimates by 3.2%. Over the next 12 months, Wall Street expects Illumina’s full-year EPS of $4.15 to grow 11.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Illumina has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 10.8% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Illumina’s margin dropped by 5.3 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Illumina’s free cash flow clocked in at $208 million in Q1, equivalent to a 20% margin. This result was good as its margin was 16.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? 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 historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.3%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Illumina’s ROIC has increased significantly. This is a good sign, and we hope the company can continue improving.

Illumina reported $1.24 billion of cash and $2.53 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.17 billion of EBITDA over the last 12 months, we view Illumina’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $47 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Illumina beat analysts’ revenue and EPS expectations this quarter. On the other hand, it lowered its full-year EPS guidance missed. Zooming out, we think this was a mixed quarter. The market seemed to be hoping for more, and the stock traded down 3% to $77.19 immediately after reporting.

Updated: May 19, 2025 at 12:05 AM EDT

Before deciding whether to buy Illumina or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Illumina falls short of our quality standards. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its rising returns show management's prior bets are at least better than before, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Illumina’s P/E ratio based on the next 12 months is 18.1x. At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $106.60 on the company (compared to the current share price of $80.01).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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