Fulgent Genetics: Now The Going Could Get Much Tougher (NASDAQ:FLGT)

Investment Thesis

Fulgent Genetics, Inc. (NASDAQ:FLGT) is a leading next-gen sequencing (NGS) genetic testing provider. It has benefited tremendously from serving the COVID-19 testing market, as its cash balance ballooned to nearly $1B.

The company also reported a robust FQ4 card that outperformed its guidance and consensus estimates. However, the company left several questions unanswered about its long-term operating model. Although the pandemic has significantly lifted its profitability, the road ahead is less clear.

Nevertheless, FLGT stock’s valuation is supported by its robust balance sheet. The company also authorized a $250M stock repurchase program in early March to capitalize on what it considered an “attractive opportunity” in the market.

We discuss why FLGT remains a Buy.

Lack Of Long-Term Guidance Is A Concern

Fulgent reported FQ4 revenue of $252M, down 14.7% YoY. However, it was not unexpected, as the company continues to wind down its COVID-19 testing revenues. Nevertheless, the onset of the Omicron variant boosted its performance, as it came in above its previous guidance in FQ3.

Therefore, the company has been making several acquisitions over the past year to strengthen its core business. It has also expanded its investments to Helio Health and Spatial Genomics recently. However, management has been reticent in providing long-term guidance over its recent investments and integrations.

As such, we think the lack of visibility is somewhat of a concern. Therefore, it requires investors to have high conviction over management’s ability to execute. Nonetheless, management is confident in garnering those synergies. CFO Paul Kim articulated (edited):

Now with the M&A journey, we are ready to capitalize and get more active on that front.

And we are looking forward to showing the street that we do have just as much ability to integrate assets and show synergies, not just from the expense side, but from the revenue side as well, all leading to our reach into wider and bigger markets. (Fulgent’s FQ4’21 earnings call)

Notably, management is likely to ramp its acquisitive pace moving forward. Fulgent believes that the valuations in the market have normalized meaningfully, providing the company with several opportunities for its consideration.

Therefore, Fulgent is leveraging its considerable cash balance to its advantage. Kim accentuated (edited): “We have a number of different projects that are happening right now. The valuations are becoming closer aligned to real business prospects rather than some of these long-dated assets with colorful stories.”

However, we remain bothered with Fulgent’s lack of long-term guidance, despite its commitment to its M&A cadence. Investors also need to consider several execution risks that could impact its integrations.

Furthermore, Fulgent added a new risk factor in its recent 10-K that highlighted why the company has been unable/unwilling to provide long-term guidance. It added (edited):

Although we achieved profitability for the years ended December 31, 2020, and 2021, we may not be able to maintain profitability in future periods.

Further, our revenue levels may not grow at historical rates or at all, and we may not be able to achieve additional profitability or sustain profitability.

We may incur additional losses in the future. While we experienced significant profitability in connection with the launch of our COVID-19 tests, we anticipate that demands for these tests will eventually decrease as and if the prevalence of COVID-19 eventually decreases. (Fulgent’s FY21 10-K)

But Its Valuation Is Supported by Its Robust Balance Sheet

Therefore, it was not surprising that management guided to $600M in FY22 revenue (down 39.6% from FY21). Notably, its core business is expected to account for just $120M in revenue, or 20% of its FY22 guidance.

Management also added that on a Pro-forma basis, its core revenue is estimated to increase by 20% YoY in FY22. WE had indicated in a previous article that management needs to provide Pro-forma guidance for investors. Therefore, we are grateful for the additional color.

However, we expect Fulgent’s total revenue to continue coming under significant compression due to the anticipated decline of COVID revenue moving forward. Consensus estimates also suggest that Fulgent’s FY23 revenue could fall further to $392M (down 34.7% YoY from Fulgent’s FY22 guidance).

The market doesn’t like uncertainty. Adding the execution risks emanating from its M&A activities, we can understand why FLGT stock’s momentum has been relatively weak.

Therefore, we thought it was significant when management announced a $250M stock repurchase program in early March. We have been waiting for such commitment from management for a while, given its cash balance.

In addition, it demonstrated management’s conviction over its stock’s valuation. Furthermore, the stock repurchase could potentially cover about 14.1% of its outstanding shares (based on its last traded price of $58.36). Therefore, we think it’s a firm commitment by Fulgent.

Is FLGT Stock A Buy, Sell, Or Hold?

FLGT stock is a Buy. However, we must emphasize that it’s suitable only for long-term investors. Furthermore, investors must also have high conviction over Fulgent’s NGS business model and its ability to execute its integrations. Notably, Fulgent doesn’t have a track record of integrations before COVID, and therefore we think investors need to build in an appropriate level of skepticism.

Nonetheless, we believe that Fulgent’s massive cash balance and stock repurchase signal indicate its reasonable valuation.