Better Buy: Illumina vs. Guardant Health

Thanks to scientific breakthroughs, we're living in an age of miracles, according to David Gardner, cofounder of The Motley Fool. We'll examine two healthcare companies that are examples of modern-day miracle makers to decide which stock is better positioned today: Illumina (ILMN -2.49%) and Guardant Health (GH 0.67%) 

Illumina has made genomic sequencing available to the masses, while Guardant has developed minimally invasive liquid biopsies to detect cancer. While both healthcare companies hold enormous promise in the field of medicine, the question is: Which company's stock is a better buy today?

Image Source: Getty Images

There's no way to answer that question with 100% certainty, but by comparing the two companies on financial fortitude, valuation, and sustainable competitive advantage, we can get a better idea of where they stand in the long run, and which is more likely to pay off.

Financial fortitude

The first metric is financial fortitude. In the world of biotechnology, this is very important. Lots of companies have exciting ideas that could change the world, but at the end of the day, they have little to show for it. 

It takes millions of dollars and plenty of time to bring a solution to market. Then once it's on the market, there's the hurdle of getting people to buy your product and keep buying it over time. That's why it's important to monitor a biotech's ability to withstand any economic downturn, like a greater recession or a company-specific obstacle.

Keeping in mind that Illumina is valued at nearly six times the size of Guardant, here's how they stack up financially:

Data sources: Yahoo! Finance and SEC filings. Cash includes long- and short-term investments. Free cash flow presented on trailing-12-month basis.

Here we have a clear winner: Illumina. This isn't a serious knock on Guardant -- the company is young and has shown a promising start on the public markets. Its cash position gives it at least a few years before it either needs to be free-cash-flow positive or make a secondary offering. But it can't compete with Illumina's stellar balance sheet and strong free cash flow.

Winner = Illumina

Valuation

Next, we have valuation. There's no single number that can tell us if a stock is "expensive" or "cheap," but we can consult a number of different metrics to give us a more holistic picture.

Data sources: Yahoo! Finance and E*Trade. P/E presented on non-GAAP basis when applicable. N/A = Not applicable due to negative earnings and free cash flow.

The figures above should help illuminate why this is such a difficult thing to measure. Because Guardant is in the premature startup phase, it's almost impossible to value the company with anything other than its price-to-sales ratio -- and in that respect, Guardant is much more expensive.

That doesn't mean it's dangerous to buy Guardant right now, or that Illumina is cheap -- with a P/FCF ratio of 48, it's far from cheap. But at least we know what we're getting with Illumina, which gives it the competitive edge over Guardant.

Winner = Illumina

Sustainable competitive advantages

Finally, we have the most important thing to measure: the sustainable competitive advantages -- or the moats -- that protect each company.

Illumina's gene-sequencing machines have made the process of decoding our DNA quick and (relatively speaking) affordable. These range from the tiny iSeq machines all the way to massive NovaSeq ones, costing between $20,000 and $10 million. 

But what if someone came along and developed a better system? Would customers leave Illumina? That's where switching costs come in. The company's installed base of more than 11,500 machines gives it a clear advantage when it comes to high switching costs. Any hospital or research agency that has forked over big bucks for an Illumina machine will want to reap its full value; There's no need for two machines that do the same thing. That said, when upgrade cycles come into play, there's no guarantee the competition won't offer something better.

Guardant Health offers liquid biopsies for cancer detection. Recently, the company's Guardant360 blood test has been winning over investors. But the Lunar-1 and Lunar-2 blood tests -- which could be used for early detection in otherwise-healthy patients across the world -- really give the company a huge market. But that doesn't mean there's a wide moat. While regulatory approval is hard to come by, the competition could beat it with something better.

The real moat is in the data collected by Guardant Health. Because it is the first-mover in this nascent space, it can collect more data to interpret and offer feedback to doctors, far superior to offerings from its peers. 

That said, I'm not terribly impressed with either company's moat. Illumina's installed base is strong, but there's nothing to keep customers coming back when they upgrade. And Guardant has a head start on data, but it's too early to tell how much of a differentiator that might be.

Winner = Tie

And the winner is...

Both of these are very exciting companies doing important things in healthcare. While both of them have some semblance of a moat, I'm not too excited about either, though Illumina gets the nod here thanks to its financial fortitude and valuation.