The Monster Business Lurking Behind Fulgent's COVID Results

Like many companies, Fulgent Genetics (FLGT 0.98%) has been labeled a "pandemic stock" by some investors. It's easy to understand why. In the most recent quarter, 82% of Fulgent's revenue came from COVID-19 tests. However, buried beneath this headline statistic is a genetic testing business that's growing like a weed and represents the future of the business. 

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Monster growth behind COVID testing

In the most recent quarter, Fulgent's revenue grew to $126 million, a 124% increase over the third quarter of 2020. Taking a look at previous quarters, the overall revenue results for the company have moved in concert with the volume of COVID testing. Revenue hit its peak at $359 million in Q1 2021 as the world was dealing with the delta variant. However, if we strip out the revenue from COVID testing, we see that Fulgent's core business, its Next Generation Sequencing (NGS) testing, has grown impressively.

SOURCE: FULGENT COMPANY FILINGS. YOY = year-over-year

Fulgent has secured some large COVID testing contracts, most notably with Los Angeles County and the New York City School District, so some of this revenue will remain for some time. However, the long-term success of the business will depend on Fulgent growing its NGS testing. It's clear that Fulgent has been able to service the COVID testing demand while still growing its business for the future. This will be vital as COVID counts decline over time.

Acquisitions adding to testing advantage

One of the competitive advantages Fulgent believes it has is its menu of customizable genetic tests. To further expand that menu, Fulgent made two recent acquisitions of companies that widened its exposure to new geographies and market opportunities.

In July 2021, Fulgent paid $20 million for a minority interest in Helio Health, and in August 2021, Fulgent acquired CSI Inc. for $50 million in cash and up to $10 million in future milestone payments. Both companies expand Fulgent's presence in the cancer testing market, and Helio Health specifically increases Fulgent's footprint in China. That investment is already paying off as Q3 international revenue was up 180%, attributable mostly to the investments in China. This is noteworthy as international revenue is currently less than 2% of overall revenue, presenting an enormous growth opportunity. 

Investors are missing this opportunity

Despite this strong NGS testing business, Fulgent's stock is still undervalued. At the time of this writing, Fulgent is up by almost 73% year to date, handily beating the S&P 500's 24% return. However, Fulgent only trades at a price-to-sales (P/S) ratio of 2.5.

The market is clearly viewing Fulgent as a COVID stock and is worried its revenue will fall off as testing decreases. While it's true that over time there will be less COVID-related revenue, a genetic testing business growing at almost 300% deserves a higher valuation. By contrast, Moderna (MRNA 3.01%), another company whose results could be seen as being tied to the pandemic, trades at a P/S ratio of 9.8.

For current or prospective shareholders, the most recent quarterly results confirmed the strength of Fulgent's core testing business. Management was nimble in its pivot to COVID testing, and has used the resulting revenues to pour resources back into the business. There are few companies in the biotech space performing at the level of Fulgent while also trading at such an attractive valuation.