What’s Going On With Illumina (ILMN)?

Harding Loevner, an asset management company, released its “Global Equity” second quarter 2022 investor letter. A copy of the same can be downloaded here. In the second quarter, the fund returned -20.63% net of fees compared to a return of -15.53% for the MSCI All Country World Index and a return of -16.05% for the MSCI World Index. Poor stocks among expensive, fast-growing companies that continued to see selling pressure affected the fund’s performance. In addition, please check the fund’s top five holdings to know its best picks in 2022.

Harding Loevner discussed stocks like Illumina, Inc. (NASDAQ:ILMN) in the second quarter investor letter. Headquartered in San Diego, California, Illumina, Inc. (NASDAQ:ILMN) is a sequencing and array-based solutions provider for  genetic and genomic analysis. On September 26, 2022, Illumina, Inc. (NASDAQ:ILMN) stock closed at $184.12 per share. One-month return of Illumina, Inc. (NASDAQ:ILMN) was -10.29% and its shares lost 55.11% of their value over the last 52 weeks. Illumina, Inc. (NASDAQ:ILMN) has a market capitalization of $28.962 billion.

Here is what Harding Loevner specifically said about Illumina, Inc. (NASDAQ:ILMN) in its Q2 2022 investor letter:

“Illumina, Inc. (NASDAQ:ILMN) enjoys an enviable recurring revenue model; sales of proprietary machinery bring customers onto its platform, but higher-margin consumables and services represent 80% of sales. The nature of the genetic sequencing business is such that as the cost of sequencing falls, demand increases because myriad new applications—from large population health studies to advanced areas of research such as single-cell analysis, proteomics, and spatial biology—become economically viable. Illumina has sustained strong earnings growth by using its technology and unmatched scale to keep its costs of production below those of its competitors while also capturing the lion’s share of increased volumes. Over the past five years, the company has grown revenues at a 14% annualized rate and generated US$3.5 billion cumulatively in free cash flow.

Now, though, the business is suffering fallout from its controversial decision last summer to acquire GRAIL, a groundbreaking Illumina-incubated startup, over antitrust objections from US and European regulators. Few have questioned GRAIL’s potential. The firm makes an early-detection diagnostic test capable of recognizing circulating tumor DNA long before a patient might exhibit symptoms of cancer. Even with the test’s current high rate of false positive results, a function of the limited data currently available on which its AI has been trained to make predictions, its future market opportunity is significant. The issue is whether Illumina will get to reap the benefit of the US$8 billion acquisition. The fact that this is a vertical merger could help Illumina prevail in its antitrust fight, but we acknowledge the possibility that it will be forced to spin off or sell GRAIL, possibly at a much lower valuation.

On an unrelated front, Illumina also appeared to face a pair of credible new rivals when the venture-funded firms Ultima and Element Biosciences separately announced competing technologies that, on paper at least, are more cost effective than those currently employed by Illumina. Some industry observers have seized on this incipient threat to question whether Illumina has somehow let its guard down in not pushing the price of sequencing even lower, and therefore left an opening for the new entrants to the marketplace. We see little evidence of that hypothesis (the price of sequencing over the past five years has declined at 20% a year) and, moreover, have questions whether the challengers’ claims are quite what they seem. The companies have produced a small run of prototype machines and published data claiming a lower cost of put-through. Will those economics hold up in the move into full-scale production? It’s hard to know. What is known is that when customers purchase and operate large-scale sequencing equipment, numerous ancillary costs and services are also involved. Illumina’s incumbency confers a huge installed base of instruments and informatic software—while the challengers will be starting from scratch…” (Click here to read the full text)

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Illumina, Inc. (NASDAQ:ILMN) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 44 hedge fund portfolios held Illumina, Inc. (NASDAQ:ILMN) at the end of the second quarter which was 54 in the previous quarter.

We discussed Illumina, Inc. (NASDAQ:ILMN) in another article and shared Baron Funds’ views on the company. In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.

Disclosure: None. This article is originally published at Insider Monkey.