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Stock Analyst Update

Illumina Should Dominate in High-Throughput Sequencing

The narrow moat company's results and announcements give us confidence in its ability to drive innovation in the genome sequencing market and maintain its competitive advantage.


 Illumina (ILMN) has announced several positive developments that should maintain the company's strong growth trajectory, but we don’t anticipate any major change to our fair value estimate at this time. Management expects 10%-12% revenue growth and adjusted EPS of $3.60-$3.70 in 2017, which is relatively close to our forecast. These announcements still give us confidence in Illumina’s ability to drive innovation in the genome sequencing market and maintain its narrow economic moat.

Illumina’s announced partnerships with IBM’s Watson and Philips help shore up the firm's data-analysis capabilities and clinical diagnostic marketing efforts, respectively, but the announcement of a new sequencer called NovaSeq is the biggest news. Although NovaSeq utilizes Illumina’s core sequencing-by-synthesis technology, its new platform architecture represents a new chapter in technological advancement that should eventually replace Illumina’s older high-throughput HiSeq product line. NovaSeq offers a number of critical improvements in ease of use, testing versatility, faster run times, and lower operating costs thanks to an assortment of newly engineered high-density flow cells, improved two-channel chemistry and optics, and other improvements.

While NovaSeq doesn’t necessarily alter Illumina’s growth trajectory, in our view, it does exemplify Illumina’s ability to stay a step ahead of competition. The NovaSeq should help ensure Illumina’s dominant position in the high-throughput-customer segment of the market over the next few years. The less penetrated clinical market still represents a larger market opportunity for Illumina, but more competition in this lower-throughput segment and more complex reimbursement issues remain challenges for the firm. Management hopes to launch the previously announced FireFly sequencer later this year; combined with other marketing efforts, this should help Illumina address some of the hurdles among this customer group.

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Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.