If you invested a modest $1,000 into shares of Fulgent Genetics (FLGT 0.48%) back in January, that investment would have turned into $3,750 as of Dec. 8. That is a stunning performance considering the S&P 500 index only returned 14.5% during the same period.
As it turns out, the second or third (depending on geographical location) wave of the coronavirus that's plaguing the world is leading to record demand for COVID-19 tests. Genetic testing specialist Fulgent has seen its revenue and bottom line skyrocket. Now that the stock is up nearly 300%, is it a good idea to buy shares at the all-time high? Let's find out.
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A marvelous business
During the third quarter of 2020, Fulgent delivered more than 1 million COVID-19 diagnostic tests, COVID-19 antibody tests, seasonal flu tests, and tests for genetic diseases. That's up an astonishing 800% from its test volume in Q3 2019.
The company's family of coronavirus tests are highly accurate and have received backing from multiple states, county-level health agencies, and private firms alike. For example, Fulgent is responsible for COVID-19 testing for the 12,000 employees who work for the State of Ohio. It also landed an agreement to perform the same tests for thousands of employees who work for one of the world's largest biotech firms.
That's not all. The company managed to increase its sales more than nine-fold compared to Q3 2019, to $101.7 million in the quarter. On top of that, its gross margin expanded by 12 percentage points, and it was able to post a profit of $2.08 per share.
Compared to Q2 2020, Fulgent decreased the cost to perform its COVID-19 test by 42% to $25 apiece. The company charges between $50 to $100 to perform the test, and insurance companies pick up the bill for a vast majority of them, with about 590,000 reimbursements in Q3 2020.
Its current coronavirus test capacity is about 60,000 per day, with the potential to expand that figure to 80,000 per day. Considering the U.S. daily coronavirus case count is rising above 200,000, testing demand remains extremely high.
For 2020, Fulgent expects to generate $300 million in sales, a massive increase over the $32 million it brought in last year. As an icing on the cake, the company also expects to bring in $40 million from its testing services, excluding COVID-19.
Is this growth sustainable?
The main issue facing Fulgent has nothing to do with its technology or business, but instead coronavirus vaccines. There are already multiple vaccines that have achieved over 90% efficacy in late-stage trials and have received emergency use authorizations from numerous regulatory bodies worldwide. Since coronavirus vaccines grant patients immunity to the disease, testing for it would likely become redundant.
Governments around the world are more than ready to deploy these vaccines en mass. In addition, there are more than 5.7 billion pre-orders of COVID-19 vaccines.
This is a problem that's facing all coronavirus testing companies and is by no means exclusive to Fulgent. However, Fulgent is undoubtedly one of the most at-risk of facing a revenue shortage due to a disproportionate amount of its sales and growth coming from testing for COVID-19.
What's the verdict?
Depending on the progression of the pandemic, Fulgent's stock will fluctuate dramatically. If there is a significant demand for testing despite the release of vaccines, the company's shares may be trading for as little as 3.9 times revenue. On the other hand, should mass vaccination render testing pointless, then Fulgent is at risk of losing all of its new income. In this scenario, the stock will be rather overvalued at around 29 times sales based on sales from its non-COVID-19 related business.
Right now, two vaccines from Pfizer and Moderna are on the verge of receiving emergency authorization in the U.S. and one of them is already being put to use in other parts of the world. There are also several other late-stage vaccine candidates pending phase 3 data, so I think it's more likely that the second scenario mentioned above will come true. That doesn't mean testing is going away immediately, but the growth for testing volume would probably plateau and decline from now on.
Investors who wish to consider Fulgent stock at the moment are arguably very late to the game and might want to consider other hot coronavirus companies or biotechs in general. In addition, those who saw spectacular returns after a small investment in Fulgent shares at the beginning of the year should seek to take some money off the table.
