Can The Legendary Carl Icahn Save Illumina?Mar 21, 2023
Price Target: $288 (31% upside)
Current Price: $220
Target Date: Q1 2024
Stock: Ilumina ($ILMN)
Last time we checked in on DNA-darling Illumina ($ILMN), their world-class tech and wild margins were getting completely overshadowed by their way-too-expensive acquisition of the cancer-screening company Grail.
We got an awesome update about that last week which has the market really excited: Carl Icahn has initiated a proxy fight to replace key members of Illumina's board with the goal of unwinding Grail Inc. and refocusing the company.
The Grail acquisition is a huge weight on Illumina's books right now and therefore the market absolutely loves the battle.
But rather than a short article about a proxy fight, let's take a look back at Illumina's core business and see how they've performed even with a "weight on their neck".
No matter what, there are great signs here. Let's make this one quick.
Let's explore the details below 👇
Q4 wasn't anything particularly special for Illmina, particularly in comparison to an absolute barn-burner of a Q1 in 2021.
But Illumina managed to hit guidance for the year and modestly grow yearly revenue despite the costs associated with the Grail acquisition holding them down.
We'll get into Grail more in a bit, but for now, let's talk about Illumina's most exciting news.
A little bit ahead of schedule, their NovaSeq Series X sequencers have started shipping.
For our intro to Illumina (read that here) we took you through the wild cost-cutting that Illumina has pulled off in gene sequencing.
Series X takes that to a whole new level by being ultra-high throughput -- theoretically getting the cost of sequencing a whole genome down to merely hundreds of dollars.
Of course, clients aren't using Illumina's products to sequence whole genomes for the most part, they're sequencing specific markers on things like cancer cells to help doctors with diagnosis and treatment.
Just having this kind of bandwidth is massive for Illumina's high-end clients.
It's really exciting these products are shipping now as they'll help Illumina eat into a >$100 Billion TAM in diagnostics alone.
With growth and excitement like this, the stock should essentially already be at our price target.
So the question right now is simple: Why is the market so jazzed for a proxy fight now?
The Coming Proxy Battle:
Our intro to Illumina glossed over this point as most of the damage Illumina's Grail acquisition had already been done.
Here's the short of it: Illumina has been moving to diversify outside of sequencing for a while, and as a part of that, they acquired a cancer-testing company Grail. Illumina beat the antitrust case in the US, but they're still fighting it in the critical European market. Illumina has to set aside $450 Million of dry powder to cover any fines the EU might impose.
Here's the thing though: Illumina didn't just acquire Grail -- technically they spun Grail out of their own operations before acquiring them.
That's why the EU has towed such a hard line here, acquiring Grail gives Illumina an unfair advantage when the company can still benefit from Grail's operations if they are an independent company.
Furthermore, by holding on to Grail and trying to make it fit in as a part of Illumina, they have wasted valuable resources and essentially prevented Grail from organizing operations in such a way that would be more efficient for an oncology-specific brand.
This is why Carl Icahn is launching this proxy battle -- there is a lot of value to be created if Illumina just gives up on the regulatory pressure the US and EU are dropping on them.
They have a brilliant product line that they could expand more aggressively if they didn't have to hold on to so much cash needlessly.
From a more nerdy perspective, we understand why Illumina management would want to hold onto Grail. The technology is awesome and it kind of slots in really well with what Illumina is doing.
But, like with the GE Healthcare spin, certain sectors benefit a LOT from specialization.
And this is one where Illumina wins by giving up a more dominant market position. Regardless of where the proxy battle leads, Illumina has some solid growth routes.
What we like here is that Illumina has solid growth paths no matter what plays out in this proxy fight.
What the proxy battle revealed is a company that is being heavily undervalued thanks to the regulatory environment surrounding Grail.
Our price target reflects a middle-of-the-road growth path for Illumina while this shakes out.
The headline here is NovaSeq Series X and the fact they're shipping in Q1.
Even with a huge reserve of cash weighing down their books, there is still a good amount of growth to be had in 2023.
No matter what, we're really excited to see how Illumina pushes forward this year.
Risk/Reward: High/ Very High
Market Cap: $35B
Dividend Yield: 0%