Fulgent genetics (FLGT 1.39%) has been a fascinating company to watch over the past few years. Since the end of 2019, shares are up 187% compared to the S&P 500is 23%. While that’s an impressive market swing, there was a point in early 2021 where Fulgent’s stock rose more than 1,300%.
This wild stock move was spurred by incredible sales growth thanks to Fulgent’s ability to transition to providing COVID-19 testing in early 2020. That made the company a prime example of the pandemic-induced mania the stock market has seen in recent years.
As the pandemic slowly eased, Fulgent continued to post strong results, but the most recent quarter raised concerns that I think investors should now be aware of. Let’s see.
Green flag: Core revenue growth remains strong
The core of Fulgent’s business is Next Generation Genetic Testing (NGS). This customizable test menu has been a successful foundation for the company for years. Once the company began to receive huge amounts revenue after COVID testing, it became necessary for Fulgent to break down its NGS core earnings separately.
In the recently reported third quarter, core revenue increased 110% year over year to $56 million, continuing this trend of strong growth stretching back several quarters. Core sales increased 59% in Q1 and 102% in Q2.
This growth has been an important metric for investors to track as revenue from COVID testing would always be temporary, at least in terms of volume over the past few years. Without knowing this key metric, one could see the 54% drop in sales in the third quarter or the 57% drop in billable tests and assume the company is in trouble.
In fact, Fulgent ended the quarter with $918 million in cash, cash equivalents and short-term investments on the balance sheet, while bringing in $21 million in cash from operations. The balance sheet is strong and the core of the business continues to grow.
Red flag: A new acquisition raises some concerns
Fulgent’s management proved to be savvy capital allocators with the revenue windfall from the COVID testing revenue. In addition to strengthening its balance sheet, the company made acquisitions and signed deals that increased its exposure to the cancer testing space and expanded its footprint in China.
However, on the same day as the Q3 2022 results announcement, Fulgent announced the acquisition of Fulgent Pharma, which heightened my management concerns. If you’re wondering how management acquired a company with the same name, it’s because they used to be one company. As part of the initial public offering (IPO) process for Fulgent Genetics, it spun off Fulgent Pharma and is now bringing it back into the fold.
According to the third quarter 10-Q SEC filing, Fulgent Genetics CEO Ming Hsieh was the manager and member of Fulgent Pharma until April of this year. This makes me wonder if Hsieh’s involvement with Fulgent Pharma drove the acquisition more than business fundamentals.
In addition, Fulgent Genetics’ board of directors has only three members, and one of them is the CEO. Such a small board is unusual and reduces the number of decision makers when it comes to things like acquisitions.
This information about Fulgent didn’t lead me to sell my stock, but it did make me think. I believe Fulgent is a strong company with a bright future. But investors should be aware of these green and red flags when making investment decisions.
Jeff Santoro holds positions in Fulgent Genetics, Inc. The Motley Fool has positions in and commands Fulgent Genetics, Inc. at. The Motley Fool recommends the following options: long January 2024 $50 calls on Fulgent Genetics, Inc. and short January 2024 $50 put on Fulgent Genetics, Inc. The Motley Fool has one disclosure policy.