Illumina Shares Rally on Activist Investor Icahn Interest

Illumina Stock at a Glance

• Current Morningstar Fair Value Estimate: $269
• Illumina Stock Star Rating: 4 stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Positive

Illumina Stock Update

Activist investor Carl Icahn has revealed an interest in narrow-moat Illumina ILMN. While details are currently limited on the actions he might take, we would welcome any actions that lead to Illumina’s market value increasing toward our fair value estimate. Even after this announcement lifted the share price in early trading on March 13, we view the stock as moderately undervalued.

According to media reports, Icahn believes that the Grail liquid biopsy acquisition materially reduced Illumina’s value after the purchase was made over antitrust regulator objections in August 2021, and he plans to nominate three members to Illumina’s board to help unlock the company’s intrinsic value. While we continue to appreciate the acquisition’s long-term potential, Grail is likely to remain a drag on Illumina’s resources and earnings power for at least the next several years, until widespread reimbursement can be achieved after Food and Drug Administration approval of its Galleri test or until regulators force IIlumina to unwind the transaction. We suspect Icahn would like the unwinding to happen sooner rather than later, which would lead to an immediate increase in Illumina’s annual earnings stream (Grail projects a $670 million 2023 operating loss). Also, uncertainty surrounding cash flows would decline without Grail; Illumina would be left with its genomic sequencing stronghold, which remains the source of its narrow moat and intermediate-term cash flows.

While we recognize the concerns that investors like Icahn have with the Grail transaction (which contributed to the lowering of our capital allocation rating recently), we also hope that Illumina investors will be able to retain some of the long-term optionality that comes with Grail. Its liquid biopsy technology could lead to earlier cancer detection, improve cancer survival rates, and reduce treatment costs, which could create significant value for investors in the long term despite the murky near-term outlook.