Illumina share price – Q3 earnings preview

Illumina's [ILMN] share price has come back down to Earth since a mid-August high. Regulatory concerns have weighed on the stock and not everyone on Wall Street is a fan of the California biotech firm.

Yet Illumina’s share price has its backers, including Piper Sandler, who reckon there’s serious upside potential. And a strong earnings result could help the California biotech’s stock get there.

What’s happening with Illumina’s share price?

Shortly after posting its second quarter numbers, Illumina’s share price hit a year high of $526 on 16 August. However since that point the stock has plummeted almost 20% (through 31 October) as the acquisition of Grail rumbles on. Over the past month, the stock is essentially trading flat and investors will breathe a sigh of relief that Illumina's share price closed Friday at $415.06 - well above a year low of $378.5 that it hit on 4 October.

What’s the background to Illumina’s Q3 earnings?

Illumina provides the machines that allow scientists to do genetic sequencing. In short, the scientists provide the samples and Illumina’s products tell them what DNA is in there. A growth area with accelerating demand.

Yet antitrust concerns in the US and Europe have weighed on the stock over its acquisition of spin off Grail. With regulatory approval in the EU due to come in the first quarter of next year, Illumina's depressed share price could represent a buying opportunity.

So, will upcoming Q3 earnings give investors reason for optimism? If the earnings do boost the share price, then what is the long-term outlook for the stock?

When is Illumina reporting Q3 earnings?

4 November.

What to watch out for in Illumina’s earnings?

Illumina is in the midst of getting its acquisition of cancer detection maker Grail signed off by the regulators. The acquisition was announced on 18 August, before the European Commission had completed its investigation into the merger, reports Reuters.

On Friday the Commission announced it had taken interim measures, including an order to keep the two companies separate. This would mean the companies would be run by separate management teams and forbidden from sharing confidential information.

Investment Manager Polon Capital also namechecked the deal in its third quarter investor letter, suggesting that the acquisition of Grail would be “highly dilutive to Illumina’s earnings in the short term”. Still Polon seems confident that over the long-term, the merger should pay off.

“We expect Illumina’s core business to strengthen as a result of this acquisition" - Polon Capital on Illumina's acquisition of cancer detection maker Grail

“We expect Illumina’s core business to strengthen as a result of this acquisition. We also expect earnings accretion from Grail in the intermediate-term as its liquid biopsy test appears to be effective for early cancer detection across 50 of the most lethal cancers (most of which there are no tests for today)."

In August Frances deSouza, Illumina CEO, told CNBC’s Power Lunch that the company was challenging whether the European Commission should even be looking into the deal considering Grail doesn’t do business in the US.

The Commission’s investigation is set to conclude 4 February. Look for any insight on the deal during Illumina’s earnings call.

What is Wall Street expecting?

Illumina is expected to post earnings of $1.14 a share in the third quarter, up from $1.02 a share in the same quarter last year. Revenue is pegged at $1.05bn, up 46.8% from the $715.91m posted last year. For the full year, revenue is expected to come in at $4.35bn, a jump of 34.4% year-on-year, although that growth rate is expected to slow to 12.4% in 2022, with revenue coming in at $4.89bn.

Is an earnings beat on the cards? Well, Illumina has form topping analyst expectations. In the past four quarters, earnings topped Wall Street expectations. In second quarter results, earnings came in at $1.87 a share, handily beating the expected $1.36.

Analysts divided on Illumina’s share price

Divided is the word that sums up analyst sentiment around Illumina’s share price right about now.

The stock has received a couple of downgrades in the second half of 2021. SVB Leerink downgraded its rating on Illumina from Outperform to Market Perform in August. SVB Leerink analyst Puneet Souda said the merger with Grail would be ‘locking-in significant dilution in 2022 despite a clear line of sight of true integration and an uncertain regulatory process that holds potential to drag into 2025 with material fines.”

In October, Souda maintained his Market Perform rating while lowering his expected earnings forecast for the third quarter from $1.35 to $1.07. The analyst has a $420 price target on the stock, suggesting a 1.2% upside on Friday’s close. October saw more bad news with OTR Global shifting its rating from Positive to Mixed, saying that pandemic-related supply issues would hurt the DNA sequencer’s spending in the third quarter.

August, however, did see some analysts back Illumina’s share price. Piper Sandler upped its target on the stock to $560 - a hefty 34% upside - while Canaccord Genuity moved their price target to $555. Canaccord analyst Kyle Mikson acknowledged that the acquisition of Grail would be dilutive over the next few years and has caused some regulatory headaches for Illumina, but that the merger was positive considering Grail’s growth potential.

Among the analysts tracking Illumina’s share price on Yahoo Finance, the stock carries an average $453 price target - hitting this would see a 9% upside on Friday’s close.