Please ensure Javascript is enabled for purposes of website accessibility

Is Fulgent Genetics Undervalued?

By Brian Orelli, PhD and Keith Speights – Nov 28, 2021 at 7:07AM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Whether Fulgent is a value or a value trap depends on the short-term prospects for COVID-19 and the long-term prospects for its core sequencing business.

Fulgent Genetics (FLGT 2.95%) looks poised to significantly beat its year-end investor estimates. In this Motley Fool Live video recorded on November 15, Motley Fool contributors Keith Speights and Brian Orelli answer a viewer question about whether this means Fulgent is undervalued.

With the vast majority of the company's third-quarter revenue coming from COVID-19 testing rather than its core business and considering the general uncertainty over how COVID-19 will progress, it's understandable that investors would discount the current revenue. However, Fulgent seems to be preparing well for a gradual decline in COVID-testing revenue.

10 stocks we like better than Fulgent Genetics
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Fulgent Genetics wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of November 10, 2021


Brian Orelli: Colin asked about Fulgent Genetics. He says they seem like they undervalued their $850 million in cash. Revenue for the quarter was $228 million with $40 [million] from their core business, which was up 300%. The company has so much optionality and cash to help fund the core business [that] total revenue for the year is forecasted at $930 million, and it trades at three times these earnings. I guess he's wondering why that's the case, and are they really undervalued?

Keith Speights: I wouldn't go as far to say as they're undervalued, Colin. I think the reason why is this: a lot of Fulgent's revenue right now is coming from COVID-19 testing. Investors know that that won't totally go away, but I think investors fully expect that revenue to decline over the long term.

Fulgent is doing a good job of branching out. Of course, it was already doing genetic testing outside of COVID-19 before the pandemic came along. But I think the company is doing a really good job of building up its non-COVID business. But there is a question of what happens when that revenue starts to taper off, assuming that it does. I think that's why the valuation isn't as high as you might expect it would otherwise be, looking at some of those numbers. Brian, am I missing something there? Do you agree?

Orelli: No, I completely agree. If you figure the $40 million for the core business versus $228 million, that's a lot that they could potentially fall if COVID falls off a cliff. If that gets cut in half, that's almost -- their revenue almost getting cut in half since the core business is such a small percentage of the total right now. I think investors are factoring that in, and I think there's a lot of unknowns. When there's a lot of unknowns, investors tend to put a smaller valuation on the thing that they can't value very well.

Brian Orelli, PhD has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fulgent Genetics. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.