After 56% Rally Can Illumina Stock See More Gains?

ILMN: Illumina logo
ILMN
Illumina

The stock price of Illumina (NASDAQ:ILMN), best known for its genetic variation and biological function systems, has rallied around 56% over recent weeks (vs. about a 40% gain in the S&P 500) to its current level of $370 after falling to a low of $238 in late March as a rapid increase in the number of Covid-19 cases resulted in heightened fears of an imminent global economic downturn. With the current rally, Illumina stock has fully recovered to the levels seen in mid-February, when the markets peaked. Is the recovery warranted or are investors getting ahead of themselves? We think it is warranted! Our conclusion is based on current stock-specific factors. We also compare Illumina stock performance vs the S&P 500 and the 2008 Recession. Parts of the analysis are summarized below.

How Did Illumina Stock Fare During The 2008 Downturn And What Does It Mean For The Stock This Time Around?

We see Illumina stock declined from levels of around $43 in September 2008 (the pre-crisis peak for the stock) to roughly $31 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 27% of its value from its approximate pre-crisis peak. This marked a drop lower than the broader S&P, which fell by about 38% over the same period.

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Illumina failed to stage any recovery post the 2008 crisis, with the stock staying at $31 level in early 2010 – remaining down 27% from the pre-crisis peak. In comparison, the S&P fared much better with its losses from the September 2009 levels standing at about 8%.

Keeping in mind that Illumina stock lost over 21% of its value between the market peak on February 19 this year to the low on March 23 and it has already bounced back 56% since then. This means that the stock has actually gained over 22% from the pre-crisis highs. The S&P remains about 6% below its pre-crisis peak.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the U.S. government’s fiscal stimulus and lower interest rates, which have made stocks attractive to investors once again. The gradual lifting of lockdowns globally has also helped the demand for some non-essential goods recover.

There were some specific levers for Illumina as well – as the U.S. FDA granted an emergency use authorization (EUA) for its COVIDSeq, a next generation sequencing based testing for coronavirus. This is important given the rise in cases in the U.S.  The company has enhanced its production and its installed base is on the rise. Also, the company has recently acquired BlueBee, which provides genomics data analysis solutions. The acquisition appears to be positive for the company, as it can help better analyze the data from Illumina’s systems.

As such, the recent gains may stick for the stock, and continuation of the rally is more likely. Looking at fundamentals, Illumina’s revenues have grown 60% from $2.2 billion in 2015 to $3.5 billion in 2019, while its earnings grew at a much faster pace from $3.10 to $6.74. Looking forward, the company expects demand for Covid assays to be very high, given the importance of testing as economies open up gradually. As lockdowns are lifted, investors could begin to focus on the company’s performance in 2021 and onward. With an improved installed base of its systems, the company can look forward to increased demand for consumables and services, which is a bigger revenue stream, compared to sales of instruments. This could potentially drive Illumina stock upward in the near term.

While Illumina looks like it can gain more, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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