Better Buy: Illumina, Inc. vs. Pacific Biosciences of California

Red dart going through DNA strand to hit the bull's-eye on a red target

Gene sequencing is hot these days. All you have to do to confirm it is to look at the stock performance of two of the leading makers of gene-sequencing systems. Illumina (NASDAQ: ILMN) stock is up more than 30% so far in 2018. Pacific Biosciences of California (NASDAQ: PACB) stock has soared more than 50% year to date.

Pacific Biosciences of California (PacBio) has stronger momentum right now than Illumina, but is it the better stock to buy? There's more to consider than just momentum. Here's how these two gene-sequencing stocks compare.

Red dart going through DNA strand to hit the bull's-eye on a red target

Image source: Getty Images.

The case for Illumina

Illumina is basically the 800-pound gorilla in the gene sequencing industry. The company has developed systems such as HiSeq for larger customers with high-throughput needs and systems like NextSeq for smaller customers. But the big reason why Illumina has been riding high lately is the success of its NovaSeq system launched last year.

NovaSeq stands as a good example of why investors might want to buy Illumina for at least a couple of reasons. Illumina is still very early in the sales cycle for the new system. The company expects most of its HiSeq customers to convert to NovaSeq, but despite a fantastic first year on the market, only 15% of HiSeq customers had switched as of the end of 2017.

An even bigger story for NovaSeq, though, is the consumables revenue that the new system is driving. The great thing about consumables revenue is that it's recurring. And as more new systems are sold, consumables revenue keeps growing.

Illumina is also benefiting from several long-term trends that should drive growth. Consumer genomics has become a really big business but is still only in its early stage of adoption. Illumina's customers include leaders in the field, including Ancestry, 23andMe, and Helix -- a company that Illumina founded.

Another trend that should boost Illumina's long-term growth is precision medicine. The company announced two deals earlier this year with Bristol-Myers Squibb and Loxo Oncology to help develop companion diagnostics for the two drugmakers' cancer therapies.

Illumina's strategy is to continue to innovate and make gene sequencing more affordable. This approach should expand the market, which should mean that Illumina will be a growth story for a long time to come.

The case for Pacific Biosciences

Pacific Biosciences doesn't boast the market share that Illumina has. However, the company has carved out a nice niche for itself -- especially in Asian markets.

For most of 2018, investors were pretty sour on PacBio stock. The company's Q1 results reported in early May were disappointing , with both top- and bottom-line declines year over year. Since then, though, PacBio has been on a roll.

On May 8, the company announced a favorable settlement in its patent infringement litigation against Oxford Nanopore. As part of the deal, Oxford Nanopore can't offer sequencing products that rely on technology developed by PacBio until the end of 2023 in the United Kingdom and Germany.

PacBio followed up with more good news earlier this month. The company announced new products on June 7 that seemed to rev up investors . PacBio launched a kit that enables increased throughput for its Sequel gene-sequencing systems and a new grant program for scientists to use the company's technology.

The appeal of the Sequel system is probably the top reason for investors to consider buying PacBio stock. Scientists prize the system's accuracy. Chinese genomics companies continue to place sizable orders with China's push to become the global leader in precision medicine. As PacBio sells more of its systems, it should be able to benefit from strong consumables revenue like Illumina does now.

Better buy

Despite PacBio's more impressive stock performance so far in 2018, I think Illumina is the better long-term pick. Illumina already generates a strong cash flow. The company continues to enjoy strong growth thanks in large part to NovaSeq's success.

Illumina stock is pricey, with shares trading at nearly 52 times expected earnings. However, high valuation multiples have been a permanent fixture of the company. My view is that Illumina's share price should still have room to move higher as demand for gene sequencing grows.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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