On Tuesday, Barclays (LON:BARC) maintained an Equal-weight rating on Illumina (NASDAQ:ILMN) and increased the price target to $145 from $135. The adjustment reflects a positive outlook on the company's next-year growth and the durability of current trends, particularly in high-throughput (HT) sequencing consumables.
The Q3 focus for Illumina was on the sequential growth of NSX+/HT sequencing consumables. According to the firm's analysis, the HT sequencing consumables grew above the 7% year-over-year growth for the entire sequencing consumables business, with pull-through improving from Q2.
The NSX consumables saw a significant quarter-over-quarter increase of 20%, indicating strong demand, particularly from the 25B flowcell's launch in its first year.
Management highlighted the clinical demand ramp and a 40% growth in connected high-and mid-throughput instruments. However, Barclays pointed out the lack of meaningful metrics to gauge the long-term durability of these trends.
While management's response suggested clinical demand is inflecting, with notable growth in minimal residual disease (MRD) testing, the firm remains cautious about whether this demand can sustain the increased capacity over the next few years.
Barclays noted that the early data supports a bullish view, with a strong performance from NSX sequencing consumables. Nevertheless, concerns linger about the rest of the business, with long-term demand pausing ahead of the i100 launch and medium throughput suffering from competitive pricing and cannibalization.
The firm's valuation approach shifted from P/E to EV/EBITDA, setting a price target based on 20x EV/EBITDA on the estimated 2025 EBITDA of $1,233 million. The analyst acknowledged the significant operating margin (OM) potential, suggesting a fair value could reach as high as $180 if growth and OM expansion are realized.
Conversely, if growth remains lackluster, the potential for further multiple expansion is limited, and shares could retreat to around $125. This presents a balanced risk/reward scenario at the current levels.
InvestingPro Insights
Recent data from InvestingPro adds depth to Barclays' analysis of Illumina (NASDAQ:ILMN). Despite the company's recent challenges, InvestingPro Tips highlight that Illumina's net income is expected to grow this year, aligning with Barclays' positive outlook on the company's next-year growth. This projection is particularly noteworthy given that Illumina has not been profitable over the last twelve months, as indicated by another InvestingPro Tip.
The company's financial health appears stable, with InvestingPro data showing a gross profit margin of 66.34% for the last twelve months as of Q2 2024. This robust margin supports Barclays' observations about the strong performance in high-throughput sequencing consumables and the NSX platform.
Illumina's stock has shown impressive momentum, with InvestingPro data revealing a 32.93% price total return over the last three months. This strong performance correlates with Barclays' increased price target and the positive trends noted in the company's core business segments.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Illumina, providing a deeper understanding of the company's financial position and market performance.
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