In a late April article , we cautioned investors that, with a stratospheric
price-to-earnings ratio of more than 80, genetic analysis instrument maker
Illumina (Nasdaq: ILMN ) might be riding a bit high in the water. That certainly
proved to be the case. Shares of the company sunk about 30% on Friday after
Illumina revealed late Thursday that its third-quarter revenue would fall well
short of Wall Street estimates. As high as $75 at the end of July, the San Diego
company's stock has been on a slippery slope since then, sliding all the way
to below $28. Of course, in every cloud there's a silver lining. In
Illumina's case, the stock now trades at a much more reasonable P/E of 30, a
small consolation to investors who got in at or near the high but perhaps an
opportunity for others. In announcing the third-quarter shortfall and suspending
full-year guidance, management pointed to a substantial slowdown in orders from
federal agencies. Other factors cited include: Continued uncertainty
surrounding research-funding levels in the U.S. and Europe The second-quarter
launch of a product that created excess capacity its customers were unable to
fully utilize A significant drop in the use of certain products by customers
using its Genome Analyzer, and Lower-than-expected upgrades by users of that
system to its HiSeq 2000 systems. Clearly, we are highly disappointed with our
revenue for the third quarter, said President and CEO Jay Flatley, according to
the Associated Press. He called the slowdown in new purchases unprecedented, and
said it resulted from uncertainties in research funding and overall economic
conditions. We expect these conditions to continue through at least the fourth
quarter, while the 2012 2013 U.S. budgets for National Institutes of Health and
other related agencies are determined, Flatley added. The company believes that
revenue for the fourth quarter will be higher than the third quarter, but it
suspended its previous guidance for a revenue increase of 24% to 26%, implying
annual revenue between $1.12 billion and $1.14 billion. Wall Street was
expecting full-year revenue of $1.14 billion, with estimates ranging from $1.12
billion to $1.17 billion. Illumina's announcement seems to be having a ripple
effect in the industry. Competitors Affymetrix (Nasdaq: AFFX ) and Life
Technologies (Nasdaq: LIFE ) also get 20-40% of their revenue from U.S.
government-backed research, and a budget squeeze is likely to affect their
performances, too. That's probably the reason their shares are down 5% and 6%,
respectively, this morning. Back in April, we noted that one analyst likened
Illumina to Apple (Nasdaq: AAPL ) for the company's ability to replace its
products before they become stale. It looks like that assessment might have been
somewhat premature.
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