Illumina

Illumina's second-quarter results included organic sales growth of just under 7% (up from 4% in the first quarter) and 10% adjusted EPS growth to $1.31, which was above FactSet consensus of $1.23. Management raised its 2026 outlook on these results.

Why it matters: After increasing over 50% so far in 2026, Illumina shares fell slightly in after-hours trading following the July 30 release, as expectations may have gotten too high. But in general, we think investors should be encouraged that top-line growth is finally accelerating at Illumina. With particular strength in instruments (30% organic growth year over year), management raised its 2026 outlook for revenue to $4.60 billion-$4.64 billion (up from $4.52 billion-$4.62 billion previously) and adjusted EPS to $5.30-$5.40 versus prior guidance of $5.15-$5.30. Illumina is also starting to benefit from new artificial intelligence initiatives. For example, Illumina's Billion Cell Atlas program is helping drug developers use AI to discover drugs, an initiative that helped boost Illumina's services and other revenue by 13% organically in the quarter.

The bottom line: Considering the firm's higher 2026 outlook and to better account for potential benefits from new opportunities, we are raising our near- and longer-term expectations, which has increased our fair value estimate to $165 per share from $135 previously. Shares still look moderately overvalued to us, but we recognize that Illumina has High Uncertainty around its cash flows, which means investors should probably consider a wider margin of safety on both the upside and downside relative to intrinsic value than is typical in life sciences. Positively, Illumina's strong instrument growth has not been affected by Roche's new sequencer launch yet, and although disruptive technology remains a risk for Illumina, our narrow moat rating reflects its large instrument base that should ensure significant recurring revenue in the future.

 

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Given the firm's rising 2026 outlook and to better account for potential benefits from developing opportunities like AI-enabled drug discovery services, we are raising our near- and long-term expectations for Illumina, increasing our fair value estimate to $165 per share from $135 previously.

After a transition period in 2025 that included the partial removal of sales from China due to a government action, we expect Illumina sales to grow 8% (up from 7% previously) compounded annually during the next five years. Illumina aims to accelerate its current growth to the high-single digits in the next few years by expanding its core sequencing business, entering multiomics, and expanding its services, data, and software business to provide more complete insights to sequencing customers. With less concern around disruption from a new entrant in the near term, given Illumina's very strong recent instrument sales, we now feel comfortable being in the middle of management's goal during the foreseeable future.

Also, we still expect significant margin improvement at the company, which is the main driver of our new 16% (up from 14%) adjusted EPS growth expectation annually through 2030. From a pacing perspective, we expect growth to accelerate during the next few years before settling closer to 10% by the end of our 10-year forecast period, including share repurchases.

Along with a mild benefit from recent cash flows since our last valuation update, the above changes in our explicit 10-year forecast period pushed up our fair value estimate on Illumina by 16%.

Also, to better account for nascent growth opportunities like AI-related opportunities in drug discovery, we have increased our very long-term profit growth assumption for Stage II of our discounted cash flow model. We now expect Stage II profit growth to start closer to the operating profit growth rate we expect at the end of the 10-year explicit forecast period, rather than our previous assumption of a mild stepdown. That change increased our fair value estimate by another 6%.

We believe Illumina operates with a narrow moat around its genetic analysis tools and services that have intangible assets and switching costs for customers associated with them. Since purchasing Solexa with its Genome Reader instrument in 2007, Illumina’s continued innovation significantly reduced the cost of sequencing, thereby enabling the rapid expansion of sequencing applications. While disruptive technologies remain a high-risk concern in this still early-stage industry, we think the firm’s differentiated technology, ongoing innovation, and large installed system base create significant entry barriers for competitors. Also quantitatively, after divesting the Grail liquid biopsy assets in mid-2024, we expect Illumina to generate ROICs over WACC for at least the next decade, which is the hallmark of a narrow-moat firm.

Intangible Assets

Illumina relies on intangible assets, such as the roughly 2,500 issued or pending patents in the United States and nearly 12,000 issued or pending patents outside of the US as of late 2025, to keep competition at bay. After application, patents enjoy 20-year terms, which prevents competitors from directly copying the company's technology. While admittedly, competitors can develop similar technology that reach beyond the legal power of patents, even slightly differentiated technical features can cause an end user to prefer one tool over another similar tool in the company’s precise scientific end markets. Also, even for a highly experienced player like Illumina, it took Illumina five years to develop its latest sequencing platform, the NovaSeq X, which we use as a barometer for how long it could take for a competitor to engineer a similar product. While new entrants are emerging, it may be difficult to fully supplant Illumina based on its differentiated technology and proven track record of innovation in this field.

Specifically, thanks to its strong emphasis on internal innovation, including spending over 20% of sales on research and development on average during the past five years to advance its sequencing technology and lower the cost per genome, we expect Illumina’s tools to remain relevant to end users for the foreseeable future. For reference, after the Human Genome Project took 13 years and $2.7 billion to complete in 2003, Illumina’s technology helped reduce the cost of whole genome sequencing faster than Moore’s law in semiconductors--to $1,000 by 2014. This pace of cost reduction and innovation has been unparalleled in the field and has created significant entry barriers for potential rivals, in our opinion. The firm is not resting on its laurels, either; with the new NovaSeq X Series (launched in 2023), Illumina can now enable a roughly $200 genome including bioinformatics onboard the system, which means the company has roughly reached the $100 genome when considering only the sequencing part of the process.

Switching Costs

Illumina also benefits from switching costs in its very large installed system base of sequencing instruments. For end users wishing to use an Illumina systems, dedicated flow cells and reagents from Illumina are required to complete the sequencing process, and most of Illumina’s consumables (over 70% of the company's sales) are dedicated. With its large installed base of sequencers, Illumina should be able to count on significant revenue streams from those consumables and maintenance-related services, going forward, and we estimate about 80% of its sales naturally recur, including instrument-related services. The useful life of its instruments typically extends between five and 10 years, and as long as Illumina’s sequencing tools remain relevant to end users, it should be able to count on substantial recurring revenue for the useful life of its instruments.

We expect Illumina’s sequencing technology to remain relevant for a relatively long period, too. Illumina's genomic sequencing technology enjoys extensive citations in industry publications, and customer workflows have been developed around its systems that need to be repeated consistently. Therefore, we think end users would need a significant reason to jump ship from Illumina’s tools from a reproducibility and end user training perspective. These switching costs should be pervasive in life science labs, but they also appear important in clinical labs because regulators play a role in ensuring test accuracy while the labs also need a standardized approach for a typically less skilled workforce than in research applications.

Disruptive Technology Risks

Nonetheless, disruptive technology remains a key ongoing threat. For example, BGI Genomics, which operates primarily in China, announced in early 2020 that its custom-built technology can sequencing a genome for $100. In China (6% of Illumina's 2025 sales), this homegrown competitor may be preferred by the Chinese government and end users, and if BGI is allowed to operate more widely, Illumina's dominance of the genomic sequencing market may dissipate somewhat. Other new startups like Ultima and Element are entering the fray with cheap technology, too, and diagnostic leader Roche has entered the sequencing market in mid-2026. In general, other sequencing techniques could emerge that eclipse Illumina's technology eventually. However, even with those potential new entrants we expect Illumina to remain economically profitable because of its intangible assets and switching costs on its very large installed system base for at least the next 10 years, which informs our narrow moat rating.

Genomic sequencing remains a relatively early stage market, and expanding sequencing indications, including the nascent liquid biopsy applications that would use its sequencers, create large growth opportunities for Illumina even without owning all of Grail.

Illumina's very large installed base of sequencing instruments should translate into significant ongoing sales of high-margin consumables and related services.

Illumina's financial health appears solid, especially after the legal finding that eliminated the potential EU frontrunning fine.

Disruptive technology risks could threaten Illumina's industry-leading sequencing platform, leading to market share losses.

A significant portion of Illumina’s growth will require clinical adoption of sequencing technology, which faces challenges such as the new competition from diagnostic leader Roche and other challenges around regulation, validation, treatment guidelines, and reimbursement.

Illumina’s success depends on management’s ability to astutely allocate capital to maintain its top-tier position in the sequencing market, which is not guaranteed.