Before the pandemic, Fulgent Genetics (FLGT +2.67%) was a little-known genetic testing business with grand ambitions but limited means. Since January of 2020, its stock has provided the not-too-shabby return of 385%.
Now, with more than $1 billion in trailing 12-month revenue derived mainly from sales of its coronavirus diagnostics and a wildly successful two years in the rearview mirror, it stands ready to thrill its investors once again.
Though it's unlikely to replicate the same impressive performance between now and 2024, there's still reason to believe that the stars are aligning in its favor. Let's take a brief walk through Fulgent Genetics' business and the inexpensive valuation of its shares to see if it might be a good fit for your portfolio in 2022.
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Why it's worth your attention
The bottom line with Fulgent Genetics is that the company's early pandemic pivot into providing coronavirus testing has built strong financial and logistical foundations that it can now use to grow with abandon.
Per its third-quarter earnings report, Fulgent is expected to make around $815 million in revenue from its coronavirus PCR tests in 2021, which dwarfs the $95 million it anticipated from its non-coronavirus genetic testing business. Moreover, the company is strongly profitable, nearly free of debt, and expanding its free cash flow (FCF) massively over the last two years.
Since March 1, 2020, quarterly revenue has exploded by a mind-boggling 2,840%, upstaged only by its quarterly FCF rocketing by 26,010%.
Data by YCharts.
While coronavirus diagnostics have been (very) lucrative, management's long-term objective is to compete in the markets for cancer diagnostics, reproductive health testing, and liquid biopsies, where there is a substantial degree of overlap. And now that sales of its coronavirus tests have helped to grow Fulgent's war chest into $470 million, it's ready to go full throttle on expanding where it has wanted to all along.
If everything goes according to plan, it'll have a vast offering of tests that doctors can prescribe or that consumers can order on their own. With such a large selection of diagnostics (many of which aren't offered by competitors), the business will be somewhat protected against others trying to attack its market share, which is another big point in its favor.
This stock is a bargain right now
Aside from Fulgent's durable business model and its breakneck pace of growth over the last few years, the stock's valuation is also highly favorable.
The diagnostic laboratory industry has an average price-to-earnings (P/E) ratio of 18.1, whereas Fulgent's is only 4.2. Likewise, the industry's average price-to-sales (P/S) multiple is 2.36, and Fulgent's is only a touch higher at 2.4.
So the stock is attractive for growth investors who prefer to get a deal, yet it isn't so inexpensive as to raise questions about quality. But as the business scales up its core genetic testing products and continues to roll out new tests to add to its repertory, its cheap valuation may become a thing of the past.
Coronavirus diagnostic revenue might go away eventually
Canny investors might be a bit skeptical about Fulgent Genetics, as it doesn't appear to have any obvious flies in the ointment. But there is one looming challenge that should be on your radar before deciding whether the stock is worth buying.
Though predictions of the pandemic's end have been incorrect so far, it's probable that it will eventually become a more manageable public health problem than it is today, thereby slashing demand for the tests that make up the bulk of Fulgent's revenue base. As this happens over time, its revenue will fall off, eventually leaving it with only the income from its oncology, reproductive health, and consumer genetic testing.
So far, it seems like the specter of that has made people reluctant to invest, but it shouldn't. Given the momentum that the company has now built, growing into its genetic testing markets will be easier than ever. Though it might take a few years to scale up enough to replace coronavirus diagnostic revenue, there's nothing that stands in the way.
The real challenge for shareholders will be to hold the stock through the likely prolonged dip between old revenue sources being replaced by newer ones.
