Illumina (NASDAQ: ILMN), best known for its genetic variation and biological function systems, trades at about 12x trailing Revenues, compared to over 19x for Intuitive Surgical (NASDAQ: ISRG), which manufactures robotic surgical platforms. Does this gap in Illumina’s valuation make sense? While Intuitive Surgical has benefited from its fast-growing installed base of da Vinci robotic surgical platforms, Illumina is being weighed down given the impact on its sales in the current pandemic. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits). Our dashboard Intuitive Surgical vs. Illumina: Is ISRG Stock Appropriately Valued Given Its significantly higher P/S Multiple Compared to ILMN? has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth
Between 2016 and 2019, Illumina’s Revenues grew by about 46%, rising from around $2.4 billion to $3.5 billion, driven by higher demand for consumables. On the other hand, Intuitive Surgical’s Revenues grew by about 67% between 2016 to 2019, rising from around $2.7 billion to $4.5 billion, led by expansion of its installed base from around 3,900 units to over 5,500 units. Consumables remain the largest revenue stream for both the companies. For Illumina it accounted for over 67% of total revenues in 2019, while the figure was 54% for Intuitive Surgical.
2. Returns (Profits)
While Illumina’s Free cash flows as a % of Revenues stood at about 30% in 2019, dropping slightly from around 32% in 2016, Intuitive Surgical’s Free cash flows as a % of Revenues stood at about 36%, down from around 40% in 2016. While the Return on Invested Capital metric for both companies has been volatile, Illumina’s ROIC was lower compared to Intuitive Surgical in 2019, standing at about 45% versus about 65%. Intuitive Surgical’s Total Shareholder Returns have been higher, driven by a surging stock price while both the companies don’t pay cash dividends. ILMN stock gains of 2.3x has been much lower than 3.5x rise for ISRG stock since early 2017.
While Illumina has a small Debt load of around $1 billion, Intuitive Surgical is debt free. Overall, neither company appears to have any meaningful financial risk.
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The Net Of It All
Although Intuitive Surgical’s Revenue Growth, Returns, and Risk metrics compare quite favorably with Illumina, we don’t think this really justifies the difference in P/S multiple of 12x versus 19x for Intuitive Surgical. The valuation of Intuitive Surgical is being driven by investor interest in its large base of da Vinci systems and the growth in number of procedures performed on the robotic platforms. On the other hand, Illumina’s valuation is likely weighed down by its current performance during the pandemic. Illumina’s Q3 sales were down 12.5% compared to a 4.4% decline for Intuitive Surgical. Illumina’s EPS of $1.02 during the quarter reflects a 47% decline from the prior year quarter, while Intuitive Surgical’s EPS of $2.77 reflects a 19% y-o-y decline.
While Intuitive Surgical has performed better over the recent past, Illumina has some positives to look forward to, primarily the rising installed base. Illumina’s COVIDSeq, a next generation sequencing based testing for coronavirus, is being widely used currently. The Illumina test is different from other tests, as it targets the full SARS-CoV-2 genome, resulting in accurate detection and high sensitivity. This is important given the spread of the Covid-19. The company has enhanced its production and its installed base is on the rise. Note that Illumina generates most of its revenues from consumables, and a strong growth in installed base means higher recurring revenues over the coming years. Overall, while we believe both the companies are great picks to be invested in, at the current valuation Illumina looks more attractive over Intuitive Surgical
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