Will Illumina Stock Rebound After A 65% Decline In The Ongoing Inflation Shock?

Illumina stock (NASDAQ
NDAQ
: ILMN) currently trades at $187 per share, roughly 51% below its level in March 2021, and it can see solid returns over time. ILMN saw its stock trading at around $184 in late June 2022, just before the Fed started increasing rates, and is now marginally above that level, while the broader S&P 500 has gained about 17% during this period. This underperformance of ILMN stock over the last year or so can be attributed to an impairment charge of $3.9 billion on goodwill and a legal contingency of $458 million (recorded in 2022) in potential fines from the European Commission related to the Grail acquisition. Note that Illumina
ILMN
acquired Grail in 2021 despite regulatory concerns, and it is likely to face a fine of 10% of its global annual turnover as a penalty for closing the deal without EU antitrust approval. ^[1]

Returning to the pre-inflation shock level of $525 (seen in August 2021) means that ILMN stock will have to gain 181% from here. While this may not happen anytime soon, ILMN stock looks attractive from a valuation perspective and can see higher levels. It is trading at 7x revenues, compared to its last five-year average of a little over 15x. Our Illumina Valuation Ratios Comparison dashboard has more details.

Our detailed analysis of Illumina’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how ILMN stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Illumina and S&P 500 Performance During 2007-08 Crisis

ILMN stock declined from $87 in August 2008 (its pre-crisis peak) to around $31 in March 2009 (as the markets bottomed out), implying that it lost about 40% of its pre-crisis value. It failed to recover post the 2008 crisis and remained at levels of around $31 in early 2010. In contrast, the S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Illumina’s Fundamentals Over Recent Years

Illumina’s revenue rose from $3.5 billion in 2019 to $4.6 billion in 2022, driven by the booming demand for gene sequencing. The company’s cancer screening and population genomics testing have also bolstered its sales growth. Also, gains from Covid-19 surveillance programs have contributed to the top-line expansion. Illumina has a recurring revenue model from consumables and services, accounting for 84% of the company’s total sales in 2022.

Illumina’s operating margin has plunged from 28% in 2019 to -91% in 2022, primarily due to impairment and other charges (related to the Grail acquisition) recorded in 2022. Our Illumina Operating Income Comparison dashboard has more details. The company’s reported earnings decreased from $6.81 in 2019 to $(28.00) in 2022.

Does Illumina Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Illumina’s total debt has nearly doubled from $1.8 billion in 2019 to $3.5 billion in 2022, while its total cash decreased from around $3.4 billion to $2.0 billion over the same period. The company garnered $0.4 billion in cash flows from operations in 2022. Given its cash position, Illumina appears to be in a comfortable position to meet its near-term obligations.

Conclusion

While the Fed’s efforts to tame runaway inflation rates are helping market sentiment, we believe Illumina stock has the potential for solid gains once fears of a potential recession are allayed. We believe investors can use the current dip in ILMN for solid gains in the long run. That said, any significant rise in legal costs associated with the Grail acquisition remains a risk factor for realizing these gains.

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