Illumina Expects to Disappoint Again in 2023; Reducing Fair Value Estimate

Illumina released its preliminary 2022 results with slightly better-than-anticipated sales but including a higher-than-expected tax rate for both 2022 and 2023. The company will likely disappoint investors again on the bottom line in the near term, despite an expected strong launch of the NovaSeq X Series. Also, Grail pushed back its FDA submission date by about a year and released a growth trajectory for the Galleri pan-cancer test that looks weaker than we had been anticipating. All in, we are reducing our fair value estimate to $269 per share from $307 previously, primarily on the reduced expectations for Grail (current value is $68 per share) and mild changes to our legacy Illumina valuation ($201 per share). The firm's leadership of the genomic sequencing business underpins its narrow moat with intangible assets and switching costs, but the Grail transaction continues to cloud the story. We've reduced our capital allocation rating for Illumina to Standard from Exemplary on these primarily Grail-related disappointments.