2017 has been an excellent year for Illumina (NASDAQ: ILMN), the market leader for gene sequencers, having revived sales growth thanks to the rollout of a new product line. Shareholders have been rewarded with a stock price that has increased 66% in 2017 after a couple of disappointing years in 2015 and 2016. But with the stock so much more expensive and an exceptional year behind it, is Illumina still a buy?
What makes Illumina so enticing to investors is its dominance of a market in the early stages of a long period of growth. The ability to read the genetic codes of people, animals, plants, tumors, and microbes is leading to rapid advances in precision medicine, agriculture, and forensics.
But, despite the steady tailwind of growing demand for genomic tools, Illumina has a rather cyclical business. Illumina makes its money by selling the instruments to sequence DNA and RNA and the consumables that are used with each run. In fact, 64% of Illumina's sales in 2016 came from the "razors" of this razor-and-blade model, and another 15% was from services. One might think this high percentage of recurring revenue would add stability to the company's growth rate, but in fact, the two product categories are closely linked, with growth in instrument sales creating corresponding growth in consumables a quarter or two later.
Source: Fool.com