Illumina Now A Buy Following Q2 Beat, Improved Sales Outlook

The firm noted that Illumina reported second-quarter revenues of $662 million, beating the consensus estimate of $642 million, and adjusted earnings per share of 82cents, also exceeding the Street forecast of 69 cents. Gross margins also exceeded forecast, helped by the revenue beat, partly offset by lower gross margins on initial NovaSeq.

The firm also indicated that HiSeqX consumables increased in the second quarter, thanks to strong utilization of HiSeqX in China and due to liquid biopsy studies. However, HiSeq consumables declined sequentially, as customers worked down their inventory as they prepare for conversion to NovaSeq.

On the outlook, the firm noted that the company raised its 2017 revenue growth guidance to the high end of its earlier outlook of 10–12 percent and reiterated its adjusted earnings per share guidance of $3.60–$3.70.

NovaSeq Going Strong

Analyst Mark Massaro noted that NovaSeq beat the Street forecasts as well as the management's internal order forecast for the second quarter by 30 percent. Illumina announced NovaSeq in January, which is the company's newest technology to determine the nucleotide order of a given DNA fragment.

Massaro expressed surprise at the orders from customers new-to-sequencing and the conversion from benchtop-only customers, who accounted for one-third of Illumina's 95 orders in the second quarter.

The analyst pointed out that we are only in the third quarter in what he believes to be a three-year major upgrade cycle to the Novaseq, with demand springing from all over the globe.

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Raising Estimates, Price Target

Additionally, Canaccord Genuity said we are in the early stages of major waves of cancer growth, ranging from development of companion diagnostics for targeted IO therapies to massive oncology studies.

The firm also sees robust ongoing growth in direct-to-consumer revenue and global population level sequencing projects.

"Shipments to China grew +16% and we believe China is likely to be a double-digit grower for ILMN over the next several years, driven by the Chinese Precision Medicine Initiative," the firm said.

The firm raised its 2017 revenue estimate from $2,675 million to $2,685 million and 2018 estimate from $2,990 million to $3,010 million. The firm also increased its adjusted earnings per share estimate for 2018 from $4 to $4.30.

For 2019, the firm initiated revenue guidance of $3,250 million and adjusted earnings per share guidance of $4.90.

Along with the upgrade of rating on the shares from Hold to Buy, Canaccord Genuity also raised its price target from $170 to $215.

At the time of writing, shares of Illumina were up 2.63 percent at $199.58.