Illumina Tanks on Reduced Revenue Forecast

Reduced revenue forecast

Yesterday, Illumina (ILMN), the leader in the genome sequencing segment, released its second-quarter revenue forecast of $835 million, which is a YoY rise of nearly 1%. This performance is not only lower than the 7% YoY revenue growth guidance provided by the company in its first-quarter earnings call, but also lower than the consensus estimate by $3 million.

According to the second-quarter revenue forecast press release, Illumina suffered a revenue setback of around $30 million due to a delay in the closing of orders of sequencing systems and consumables for certain population genomics initiatives. These orders are now expected to close in late 2019. Plus, Illumina reported $10 million lower revenues than expected due to lower-than-anticipated shipments of its non-high throughput sequencing systems and consumables. The company also reported $10 million lower revenues due to weaker DTC (direct-to-consumer) marketing, especially in array services.

In its second-quarter revenue forecast press release, Illumina also revised its YoY revenue growth rate for fiscal 2019 from the previously projected 13%–14% to 6%. The company expects revenues to remain pressured due to weaknesses in DTC marketing, the lower than previously anticipated ramp-up of certain population genomic initiatives, and lower demand for non-high throughput sequencing systems and consumables.

Stock price movements

Before the announcement, Illumina’s stock closed at $363.66 yesterday, 2.42% lower than the previous close. The fall has continued today, and the company is already down by 15.57% to $307.00. Today, Bank of America Merrill Lynch also downgraded the stock rating from “buy” to “underperform.”

Why are investors panicking?

The dramatic drop in Illumina’s stock mainly reflects investor concerns over downward revisions in revenue forecasts across all business areas.

In its second-quarter revenue forecast press release, Illumina revised downwards the YoY fiscal 2019 revenue growth rate for its overall sequencing business from the previously projected 12% to 10%, while the revenue growth forecast for the sequencing consumables business has been brought down from 20% to 15%. The company now expects its array business to report a 14% YoY revenue decline, as against the previously projected flat revenue performance for fiscal 2019. To know more about Illumina’s business, please read Genome Sequencing: Illumina’s Core Business.

All this bad news has come as a shock to investors after an especially strong first-quarter performance where Illumina outpaced the consensus revenue estimate by $7.3 million and the consensus EPS estimate by $0.25. The company has been trading at a forward PE of 47.41x, a PE of 63.06x, and a PEG (PE to growth) of 2.97x. Such high multiples are seen mainly for high growth stocks. Concerns about the growth trajectory of the company are making investors question the fundamentals backing the high valuation multiples.

The 16 analysts tracking Illumina have an average target price of $330 on its stock, which is lower than the company’s closing price yesterday.