Investing in the healthcare space can be tricky. Many companies are new -- promising exciting technologies and therapies -- but they have yet to prove themselves as long-term successes. As a result, some stocks can look cheap due to lower share prices.
That said, there are healthcare companies that are quality businesses and also happen to have low share prices. These businesses are not without their risks, but they have shown enough promise that they're worth buying at today's prices.
Let's dive into two of these companies to see what makes them no-brainer stocks to buy right now.
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1. Fulgent Genetics
Fulgent Genetics (FLGT 1.24%) offers inexpensive, customizable genetic tests with quick turnaround times that allow physicians to get information they can use to treat patients. When the pandemic began, Fulgent was able to pivot to providing COVID-19 tests, which resulted in incredible revenue growth that has allowed the company to pour resources back into the business as well as make some key acquisitions.
In its recent Q1 2022 earnings release, Fulgent reported revenue of $320 million. While this was a year-over-year decrease of 11%, this quarter's revenue was being compared to Q1 2021, when revenue grew 4,500%. Compared to the previous quarter, revenue in Q1 grew 27% and was the fourth consecutive quarter of sequential growth.
More important to the future of Fulgent's success is its core revenue, excluding COVID-19 NGS testing. Put simply, Fulgent's business is built around its Net Generation Sequencing (NGS) genetic testing, and once revenue related to COVID-19 fades away, this core business will be what investors should keep an eye on. This metric grew 59% in Q1, showing that although the headlines often tie Fulgent's success to pandemic-related sales, the business is strong beyond that revenue source.
Fulgent has also made some key acquisitions and partnerships over the past year that have increased its exposure to the cancer diagnostic space and increased its presence in China. Even after these moves, the company ended Q1 with $1.1 billion in cash, cash equivalents and marketable securities on its balance sheet, giving it plenty of dry powder to seek out more acquisitions or make investments in the existing business.
Despite these strong results, the stock is only trading for 1.7 times its trailing sales. This is nearly the lowest that multiple has ever been, and is well below the price-to-sales (P/S) ratio of 4.3 for competitor Abbott Laboratories. Considering its upside, this valuation makes Fulgent a no-brainer in my eyes.
2. Outset Medical
Another exciting company in this space is Outset Medical (OM 3.11%). Outset sells what it calls a dialysis clinic on wheels, which allows patients to complete dialysis treatments in more convenient, less expensive settings, including their homes. Outset generates most of its revenue from the sales of these Tablo machines as well as the consumable materials associated with treatments.
In Q1 2022, Outset grew revenue 33% year over year and 8.5% sequentially. Much like Fulgent, this quarter's increase was on top of strong year-ago revenue growth, making these results more impressive. Outset also took a major step forward with its gross margin, which increased to 14.5% as compared to 1.3% in Q1 2021.
Unfortunately, this gross margin expansion didn't translate to the bottom line since operating expenses increased 36% year over year, slightly outpacing revenue growth. This resulted in a net loss of $36 million compared to a loss of $30 million in Q1 2021. This isn't necessarily unexpected for a company at this stage in its growth, but investors will want to see steps toward profitability as the business scales.
One positive sign from the recent earnings report was an increase to its full-year 2022 guidance. The company now expects revenue growth of between 40% and 46% compared to the previous guidance of 38% to 46%.
Outset's Tablo dialysis machine has the potential to drastically improve how patients with advanced kidney disease get treatment. The company believes that the total addressable market for its Tablo device is approximately $2.5 billion in the healthcare setting and an additional $8.9 billion in the home setting. Even taken with a grain of salt, these projections suggest there's a lot of room for this business to grow from its full-year 2021 revenue of $103 million.
The company's P/S ratio is currently 10.5, an all-time low. While investors should keep an eye on the business to ensure it's continuing to grow, the large market opportunity and track record of success make this stock a very attractive buy at this valuation. If it can capture even a fraction of its total addressable market, picking up shares at this price will make investors very happy down the road.
