Illumina, Inc.: How the Market's Smartest Company is Living Up to the Hype

Revolutionary gene sequencing company Illumina has taken the market by storm over the past year. This high-flying stock's jumped by more than 156% in that time and has only gained momentum with the months. Innovation's at the heart of this genetics gem: The MIT Technology Review recently named Illumina as the world's smartest company for its work in pioneering the $1,000 individual human genome, an accomplishment made possible thanks to Illumina's flashy new HiSeqX Ten machine.

Yet every hyped stock needs to perform to satisfy eager investors. Illumina stepped up to bat with its first-quarter earnings on Tuesday after the closing bell, with Wall Street anticipating a rise to greatness from this company. Did this innovative stock meet expectations?

Will Illumina live up to its rise?
Last year, Illumina's first quarter took a big hit following a legal loss. However, Wall Street had expected much more this year: Going into Tuesday, analysts had projected on average that Illumina would reel in $0.44 in per-share earnings on more than $390 million in revenue -- the latter figure a gain of more than 18% year-over-year.

Those expectations hardly registered on the grid after Illumina reported stellar results for 2014's first quarter, however. The company generated $0.60 in per-share earnings, blowing away analyst projections. Better still, Illumina hauled in more than $420 million in quarterly sales, putting up sales growth of 27% as compared to a year ago. While the company's gross margin retreated by two-tenths of a percent, Illumina's 66.1% gross margin warrants plenty of optimism around this company's progress. It certainly didn't hurt this stock, as Illumina's shares jumped by 10% in after-hours trading.

However, the real gains made by Illumina will come through its product sales. While the growth in its services sales have been impressive, product revenue makes up the bulk of its financial performance, and all eyes are on the HiSeqX Ten with the development of the $1,000 genome in the rearview mirror. These products aren't cheap at $10 million a pop, and with health care budgets tight and today's economic climate, there's room to worry about just how well Illumina can attract buyers in the early going.

At least, there was until it reported Tuesday that it had sold three of its HiSeqX Ten gene sequencers during the first quarter, that figure already on top of the three systems Illumina reported selling earlier on in the device's initial launch period. That's a stellar result, considering it had projected selling five of the systems in 2014, putting Illumina already ahead of its yearly expectations with three more quarters to go. Demand's there, and Illumina's facing very little real competition in the gene sequencing space so far, allowing the company plenty of room to flex its muscles and establish its leadership as the dominant player in what some analysts project could emerge as a $20 billion market.

The competition's not even close to catching up to Illumina. Thermo-Fisher Scientific boasts a formidable gene sequencing unit of its own, but Illumina's stock has blown away Thermo-Fisher's gains over the past year and has trounced the market's rally.

ILMN Chart

ILMN data. Source: YCharts.

Thermo-Fisher purchased Life Technologies for $13.6 billion in a deal that closed this February in order to take advantage of this growing market, but it will take time for the former to make the most of its buyout. Even before the acquisition, Life Technologies wasn't up to Illumina's size and prowess in this industry, and Thermo-Fisher has its work cut out to catch up to Illumina in the near future. For now, Illumina may be facing the exciting prospect of taking longer-term control of this market.

One of the next big things in health care investing
While the HiSeqX Ten system's still in its early life, it's already paying off for Illumina -- and I think that the company's hitting all the right notes with its standout financial performance. While Illumina's stock run-up and pricey 164 P/E valuation might have some investors concerned, this company's innovative edge and potential to dominate its niche for years to come is very tempting. If Illumina can keep up its momentum and fend off competitors, it could be a great long-term holding.

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Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Illumina and Thermo Fisher Scientific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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