Investing in a growth stock can be risky if the catalyst behind its strong numbers disappears. Over the past couple of years, COVID-19 has led to some strong results for certain companies while others have faltered as a result of the pandemic.
A stock that did well due to the pandemic was diagnostics and testing company Fulgent Genetics (FLGT -0.72%). When concerns around COVID-19 were high and testing volumes were through the roof, the business, and the stock, were thriving. But now, as the economy shifts gears and looks past the pandemic and toward recovery, the stock has been crashing.
Is Fulgent in trouble in a post-pandemic world or could this be an opportunity for investors to buy the stock at a significantly reduced price?
Fulgent's revenue reached nearly $1 billion last year
In 2021, Fulgent had a phenomenal year with revenue totaling $992.6 million. That's 135% more than the $421.7 million it reported in 2020 and more than 30 times the $32.5 million it posted in 2019, before the pandemic began. Even its bottom line of $507.4 million this past year more than doubled from $214.3 million a year earlier.
The problem for investors is that surge was due to strong demand for COVID-19 testing. And as that inevitably drops off, Fulgent will see its numbers take a significant hit.
The company expects revenue to drop off sharply
For 2022, Fulgent is separating its forecast into two components: COVID-19 and core revenue, with the latter including testing and next-generation sequencing (NGS) revenue that isn't related to COVID-19. But whatever way you slice it, the business is expecting to see a sharp decline in the top line. Sales for the year will come in at around $600 million -- a 40% drop from 2021's impressive figures. And its earnings per share of $6 will be down 63% from the $16.38 per-share profit it reported this past year.
However, even these totals could be doubtful because just $120 million of the top line in that forecast relates to the company's core revenue that excludes COVID-19. The company expects its core business to grow at a rate of 28% year over year.
Fulgent is looking to expand its core business
The positive for investors is that the company is making moves to bolster its NGS revenue outside of COVID and become less dependent on that area of its business. In April, Fulgent announced it was acquiring an independent pathology lab, Inform Diagnostics, for $170 million -- funded entirely through the cash the business has on hand. It's great news for investors that the company is using cash to expand its business. The deal should allow Fulgent to expand its testing into breast pathology, gastrointestinal pathology, and other areas.
However, Fulgent isn't swimming in liquidity to be able to continue doing these types of deals in cash. It ended 2021 with $164.9 million in cash and equivalents and another $285.6 million in highly liquid marketable securities. And so while this is a way to expand its business, investors also should be careful not to expect Fulgent to rapidly begin acquiring businesses.
Is the stock a buy?
Year to date, shares of Fulgent have fallen more than 42%, which is far steeper than the S&P 500's decline of 12%. It's now close to half the value of the 52-week high of $112 it hit in August of last year. And at less than four times its earnings, the healthcare stock looks to be trading at an incredibly low discount.
However, this is what you would likely categorize as a value trap since despite the apparently cheap multiple, there are concerns about the business's long-term growth beyond COVID. While its revenue multiple is low, Fulgent's future is incredibly uncertain and that's evident through the discount investors are paying for the stock today. Investors should tread carefully with Fulgent because there's a big risk its shares could fall even lower.
Next month the company reports earnings for the first three months of the year, which will offer investors some insight into how it has been doing of late and whether there has been a sharper-than-expected decline in sales. At the very least, investors should wait until after that earnings report to decide whether to buy shares of the company.