Fulgent Genetics (NASDAQ:FLGT) 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.
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.