With U.S. COVID-19 cases expected to fall over 90% in the next six months, some investors may have concerns about genetic testing company Fulgent Genetics (FLGT 4.76%) -- one of the primary COVID-19 testing companies during the pandemic -- thinking that its success is over. This, however, is far from the case.
Fulgent's core business has been growing by triple digits over the past several quarters, and its growth runway is extremely long. Fulgent could potentially be a successful investment over the next five years, despite its COVID-19 revenue slowdown.
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The key business segment
In 2020, Fulgent became known as the COVID-19 testing company, but its core business is not related to COVID-19. Its Next-Gen Sequencing (NGS) segment tests for rare diseases, and with over 18,000 single-gene tests and 900 panels, the company has a wide array of genetic test offerings.
The global genetic testing market is expected to grow 10% annually until 2027, when it could be worth over $21 billion. Fulgent is growing as if it wants to be the market leader, growing its NGS segment by 296% to $25.7 million in the second quarter of 2021. This quarterly revenue was more than what the company made in all of 2018, and its guidance projects that its core revenue will reach $110 million for the full year -- over 400% growth from 2018.
While COVID-19 revenue has risen to become Fulgent's main source of revenue -- where it expects to contribute $690 million in 2021 -- its core revenue is expected to grow faster for the year and in the future. COVID-19 revenue for the full year is expected to grow 90% compared to 2019, but core revenue is expected to grow over 200%.
Fulgent has also made moves to potentially continue this stellar growth, namely through the acquisition of CSI Labs, a controlling investment in FF Gene Biotech, and a commercial partnership with Helio Health. Management believes that its investment in FF Gene Biotech unlocks the Chinese genetic testing market for the company -- and with a population roughly 4.3 times larger than the U.S., this market provides a massive opportunity. The acquisition of CSI Labs, a leading cancer testing laboratory, will expand Fulgent's presence in somatic molecular diagnostics and cancer testing. And its partnership with Helio Health, where Fulgent will help commercialize its blood-based cancer tests, will also help Fulgent expand its cancer testing business.
What to take away from 2020
If investors learned anything about Fulgent in 2020, it was that the management team is able to shift its business to meet the needs of consumers. Before 2020, the company did not know what COVID-19 was, and now it has made $128 million off it in the second quarter of 2021. The management team proved that it can effectively use its technology to expand its optionality, and with its recent acquisitions, this could continue.
2020 also improved the company financially. The company's second-quarter 2021 cash balance jumped nearly 10 times to $100 million -- even after its acquisitions and investments -- from the same period in 2019. In the second quarter of 2019, the company's net income was just $331,000; in the same period of 2021, the company's net income is nearly $80 million. Free cash flow also rose from $1 million for the first six months of 2019 to $276.5 million in the first 6 months of 2021.
Why is it so cheap?
The company is valued at 3.3 times its total 2021 revenue guidance, which is relatively cheap compared to other genetic testing companies like Invitae, which trades at 12 times 2021 revenue guidance. While COVID-19 revenue is likely to continue to grow, this growth could slow considerably, which is likely what is bringing down its valuation.
Another reason Fulgent might be getting a discount is because of its revenue concentration. Two customers -- the Counties of Los Angeles and San Bernardino County -- contributed 24% and 11%, respectively, of the company's revenue for the six months of 2021. If they left, Fulgent would take a massive hit, but because of their size, it would be very hard for them to stop buying tests from Fulgent.
While Fulgent might see revenue growth slow from the 800% growth it saw in the recent quarter, the company's core market is still growing fast. Fulgent proved that it can pivot and expand its business to create new opportunities, which is a superpower for any management team. As its core business continues to grow, Fulgent could potentially remain a wonderful investment for the next several years.
