Affymetrix Remains a Value Trap Until Its Results Improve

Affymetrix (AFFX) recently reported disappointing results that missed analyst estimates and lowered its full-year guidance in the process, sending the shares down sharply to trade near all-time lows set 12 years ago around the time of its initial public offering (click to enlarge chart to enlarge). The Company reported a five cent loss per share and revenues that were down by 1.6% from the year-ago period at $86.9 million [M], blaming weak sales of its GeneChip systems to drug companies for a large part of the shortfall as big pharma companies such as Pfizer (PFE) are implementing cost-cutting initiatives and trimming their R&D budgets.

Affymetrix also lowered its outlook for full-year revenue to $455 - $460M from previous guidance of $490 - $510M amid continuing weak pharma sales. The Company is also struggling against its much larger competitor, Illumina (ILMN), which sells similar systems for genetic analysis and recently posted better-than-expected results and raised its guidance.

Affymetrix is currently trading at a market cap of $528M with $460M in trailing 12-month revenues (although this includes a one-time $90M patent payment from Illumina in January), $590M in cash, and $436M in debt. The Company has 69.4M shares outstanding and a high short interest of 15.9M shares representing over 23% of the float as of mid-July. The company’s much larger rival Illumina is valued at a market cap of $5.3 billion on trailing 12-month revenue of $472M, $303M in cash, and $400M in debt. While Affymetrix may appear to be a value based on this comparison; it lacks the growth and market share gains of its larger rival.

Illumina experienced a 65.8% increase in 2Q08 revenue from the year-ago period thanks to strong sales of its Genome Analyzer systems and consumables versus a 1.6% decline in 2Q08 revenue for Affymetrix. While Illumina may be priced for perfection while trading at all-time highs; Affymetrix may be more of a value trap even after the recent decline due to its recent history of missing estimates, sinking margins, and lowering guidance. Until the operating results begin to show signs of a turnaround, I would stay on the sidelines with Affymetrix and would rather play Illumina through the HealthShares Enabling Technologies (HHV) exchange-traded fund with the Company as its top holding and a 13% stake.

Disclosure: None

Comments

[Dan Jacome:]

nice call........

@ 3/share, do you think it could go lower. Its at the 52 wk low, 9% of float is short, and trades < cash/share. it doesn't take much to have this thing double in your face..

Jan 02 04:38 PM

[Mike Havrilla:]

AFFX should do well at least early in 2009 since it is a small-cap that got crushed in 2008, although it has already rebounded by over 50% from the low around 2 bucks and used about half of its net cash to buy Panomics. Don't think I would hold it going into the next earnings release as lately they have missed estimates and lowered guidance. If the market sustains recent positive momentum, you can buy about anything and make money -- especially the small, high beta names that got beaten up last year. I haven't bought any AFFX since there is no near-term catalyst expected, although the huge cash position means they will be around long-term and could get acquired at some point.

Jan 02 06:15 PM