Genetic testing company Fulgent Genetics (FLGT 0.43%) has had a wild ride over the past few years. At the beginning of the pandemic, Fulgent experienced parabolic revenue growth when it was able to pivot from its core, next-generation sequencing (NGS) business to produce COVID-19 tests. As one might imagine, this sent the stock straight up in early 2021 with shares topping out at more than $183.
It's been a different story since then with the stock having fallen almost 70% from that high. At the time of this writing, its shares trade for $60. However, a recent press release contained a few pieces of information that have placed Fulgent at the top of my buy list.
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An important acquisition
Earlier this week, Fulgent announced an agreement to acquire independent pathology laboratory Inform Diagnostics for approximately $170 million in cash.
One of the benefits of the influx of COVID-19-related revenue Fulgent has had over the past few years is that it has been able to use the resulting cash flows to strengthen its core NGS testing business, both organically and through acquisition. Bringing Inform Diagnostics into the fold further increases Fulgent's customizable genetic testing menu by incorporating Inform's areas of expertise, including breast pathology, gastrointestinal pathology, and more. Inform currently provides services to approximately 1,300 clients and over 2,700 physicians.
NASDAQ: FLGT
Key Data Points
This week's news follows the acquisition of CSI Laboratories and a partnership with Helio Health that were announced in August 2021. Collectively, these strategic moves expand Fulgent's reach in the cancer testing space and strengthen the company's foothold in China.
Fulgent's management team has been active in using its cash reserves to broaden its core business. The company ended 2021 with $450 million in cash and cash equivalents and only $28 million in debt, so the acquisition of Inform Diagnostics still leaves the company with a strong balance sheet.
Raised guidance
Also included in this recent press release was an update to Fulgent's guidance. When the company last reported earnings in February, it had guided for first-quarter 2022 revenue of $245 million. This would have represented a year-over-year (YOY) loss of 32%. Fulgent is now guiding for Q1 revenue of $300 million, improving that loss to 16%. Investors need not worry about the YOY loss. That was a nearly impossible comp, considering that Q1 2021 saw revenue growth of over 4,000% compared to 2020. On a sequential basis this new guidance would mean an increase of 20%.
More important to the long-term success of the business is its core revenue, excluding COVID-19 NGS testing. This is an important metric to keep an eye on, because eventually the COVID-19-related revenue should dissipate. Fulgent raised the full-year 2022 guidance for this core, non-COVID-19 NGS revenue from $120 million to $175 million, a 46% increase.
Why Fulgent is at the top of my buy list
Fulgent was in the right place at the right time to respond to the need for COVID-19 testing, and has used that unexpected revenue windfall to strengthen its core business and position itself for continued success long after COVID-19 is behind us. Yet, the market seems to be pricing Fulgent shares based solely on the decreasing COVID testing revenues. Currently, the company trades for only two times sales and four times free cash flow.
There's still risk ahead for Fulgent just as there is for any company. But at this valuation, I find Fulgent too compelling an opportunity to pass up.
