Buying shares of a fast-growing company only to see its stock nearly cut in half can bring a lot of tears. But investors can overcome short-term fears by taking a closer look at the business. If everything is on track with sales and profits, it's much easier to ignore the day-to-day or even month-to-month gyrations in the market.
That's the story of Fulgent Genetics (NASDAQ:FLGT) over the past few months. The stock is off nearly 50% since its all-time high in February, but its results in 2020 and guidance for 2021 should give shareholders plenty to look forward to over a longer time horizon. The incredible growth last year demonstrated the company's ability to scale up quickly, and new partnerships have it positioned to deliver for shareholders in the years ahead.
Sowing the seeds of long-term growth
Fulgent grew sales from $19 million to $$33 million between 2017 and 2019. It did it by offering genetic testing for early detection of a disease or identifying a genetic predisposition. The company has a broad array of tests that detect any of 5,700 conditions. That breadth, as well as its ability to customize its offering, are what led to Fulgent's pre-pandemic expansion.
From the outset, the company aimed to differentiate itself in the market through its use of analytics. That's because the management team felt like it had an advantage leveraging data. CEO Ming Hsieh became a billionaire when he founded a biometric identification company called Cogent and then took it public in 2004. He later sold the business to 3M. Fulgent's current CFO and COO were both executives with Hsieh back then.
From his first earnings call, Hsieh has insisted Fulgent's combination of proprietary gene probes and data algorithms would lead to operational efficiency, letting the company undercut competitors' prices while providing better testing. The past year has proved him right.
Head over heels during the pandemic
In 2020, the company responded to COVID-19 and was able to develop two separate tests for it. The polymerase chain reaction (PCR) test came to dominate the business. Fulgent reported 4.4 million billable tests in 2020, compared to only 59,000 in the previous year. Revenue for the year was $421 million, 1,200% more than the $33 million in 2019. With COVID-19 still spreading, and the core genetic-testing volume returning to normal, management sees the elevated growth lasting at least through this year.
The company guided for $800 million in 2021 revenue, 90% year-over-year growth. Beyond the 92% projected growth from genetic testing, partnerships for detecting COVID-19 are contributing significantly. Fulgent has agreements with the school systems of both New York City and Clark County, Nevada (Las Vegas), as well as being one of four recipients of a $5 billion deal with the Department of Homeland Security.
The demand for testing continues to expand. Fulgent added six new customers between October and December that each will contribute millions of dollars per quarter. That kind of growth attracts competition.
Everybody wants to rule the testing market
Fulgent isn't alone in developing test kits for COVID-19. For instance, OPKO Health (NASDAQ:OPK) has agreements with two of the five largest school systems in the U.S., Lucira Health (NASDAQ:LHDX) recently introduced its all-in-one home-based test, and Emergency Use Authorization was recently granted to Quidel (NASDAQ:QDEL)for an influenza-plus-SARS rapid test. Even Roche Holdings (OTC:RHHBY) snapped up testing company GenMark Diagnostics (NASDAQ:GNMK) despite Roche's diagnostics division growing 14% in 2020. Although a lot of companies are vying for a slice of the pie, it's a large pie: The genetic testing business is estimated to be worth $21 billion by 2027.
Fulgent believes it will remain the partner of choice and grow its market share. Antigen testing lacks the accuracy necessary for many applications, and Fulgent's ability to turn a PCR test around in less than 24 hours continues to differentiate the company. Add in its back-end software that facilitates vaccine management and tracking community testing, and Fulgent has a comprehensive offering that its leadership feels is tough to beat.
Breaking down COVID testing
Shares of any business performing at this level are typically going to be expensive. But uncertainty surrounding the future of COVID-19 testing and the intense competition have the stock at a mere 11 times the $9.10 per share in income the company produced per share last year. The stock is only eight times the $12.50 per share that management has guided for this year. That's unheard of for this much growth. Wall Street seems to believe that the COVID-19 business is going to vanish.
Before the pandemic, Fulgent was trading at eight times sales. That makes it a good barometer for future valuation. Using 2019 sales figures and last year's 43% growth of the non-COVID business suggests a market capitalization of under $400 million if COVID-19 didn't exist. That's one-seventh where the stock currently trades. Reputable sources, however, don't think that the coronavirus is simply going to disappear. Rather, it may become an endemic disease that we have to regularly protect ourselves against. Projecting the market cap of eight times the estimated sales for 2021 would more than double where the stock trades today.
Whether Fulgent Genetics is a great buy is largely dependent on what happens in the COVID-19 testing market over the next few years. If, as many suspect, the disease persists and testing becomes routine for travel and large gatherings, current shareholders are probably set for massive returns. If not, it might take a decade for the genetic testing segment to grow into the current valuation. Based on the numbers and the news, the potential upside far outweighs the downside, making Fulgent a great stock to buy right now.