What a brutal six months it’s been for Illumina. The stock has dropped 30.9% and now trades at $84.65, rattling many shareholders. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Illumina, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free .

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid ILMN and a stock we'd rather own.

Why Do We Think Illumina Will Underperform?

Founded in 1998, Illumina (NASDAQ:ILMN) is a provider of genomic sequencing and analysis technologies for applications in research, clinical diagnostics, and life sciences.

1. Declining Constant Currency Revenue, Demand Takes a Hit

Investors interested in Genomics & Sequencing companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Illumina’s control and are not indicative of underlying demand.

Over the last two years, Illumina’s constant currency revenue averaged 2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Illumina might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Illumina, its EPS declined by 8.8% annually over the last five years while its revenue grew by 4.1%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Illumina’s margin dropped by 11.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal higher capital intensity and investment needs. Illumina’s free cash flow margin for the trailing 12 months was 16.1%.

Final Judgment

Illumina doesn’t pass our quality test. After the recent drawdown, the stock trades at 19.1× forward price-to-earnings (or $84.65 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks .

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