So far in 2020, genetic testing company Fulgent Genetics (NASDAQ:FLGT) has been a remarkable winner, even by the standards of a roaring market. Fulgent Genetics stock has gained 253% year-to-date. From March lows, it’s gained a staggering 576%.
To some investors, the parabolic rally means that Fulgent Genetics stock is due for a pullback. Or, at the least, it could suggest that the easy money has been made.
But I don’t believe that’s the case. Assuming that a high-flying stock has to pull back is part of a phenomenon known as “anchoring.” It’s the often-erroneous idea that past prices determine future performance.
Just because a stock is “cheaper” doesn’t mean it’s a buy. Conversely, just because a stock was cheaper hardly means the rally has to end. Indeed, investors need only look at Tesla (NASDAQ:TSLA), Shopify (NYSE:SHOP), DocuSign (NASDAQ:DOCU), or any other of this year’s big gainers. All looked expensive on the way up. All kept rising.
I expect a similar trend will hold for Fulgent Genetics stock. The 2020 performance hasn’t come because investors are randomly flooding into the stock. It’s come because first-half results have been impressive and suggest significant long-term growth ahead.
With valuation still reasonable even after the strong YTD gains, there’s no reason why Fulgent Genetics stock has to pull back.
Earnings Explain the Rise
It’s worth repeating; there is logic to the exponential rise in FLGT stock. All an investor has to do is look at the company’s results.
Full-year 2019 results were impressive. Revenue rose 52%, albeit to just $32.5 million. Unlike a lot of growth companies, Fulgent was profitable. Adjusted net income was 19 cents per share, though the company did post a modest loss on a GAAP (generally accepted accounting principles) basis.
But we’ve seen an acceleration of growth so far in 2020. First quarter revenue increased 44% despite pandemic impacts. Fulgent then saw its top line better than double in the second quarter.
In Q2, Fulgent admittedly got some help from the pandemic, as tests for Covid-19 contributed to growth. But that’s not all that’s going on here — nor is that tailwind likely to fade any time soon. Indeed, COVID-19 tests should be a part of the business for years to come.
It’s not just revenue, either. In Q2, gross margins expanded 8 full percentage points year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins went from 5.9% to 15.1%.
Second-quarter numbers, in particular, are hugely important to the bull case. And so, it’s little surprise that FLGT has soared out of the earnings release after rising into it.
Fulgent Genetics Stock Looking Forward
What we see from Fulgent in the results from the first half of the year is exactly what growth investors should be looking for.
The top line is growing at an impressive clip. Perhaps more importantly, there’s not much reason to project a slowdown. As Fulgent scales its platform, pricing will come down (cost per test declined 81% in Q2), making the product ever more accessible. Covid demand is going to stick around for some time, and there is likely to be another pandemic that spooks patients (though, hopefully, it will be far less severe).
Meanwhile, the company already is showing operating leverage (i.e., margin expansion). And it’s doing so both early in its growth and at a time when it would be understandable if margins were taking a bit of a hit. Between one-time pandemic-related costs and the natural upheaval caused by growth, expense control in Q2 likely was difficult. Fulgent, however, pulled it off easily.
Simply put, this is a hugely attractive story. And even after the rally, it’s still trading at a hugely attractive price.
Room to Run
Fulgent Genetics stock does not look cheap. It trades at 24x trailing 12-month revenue, and about 150x adjusted earnings per share over the same period.
But those multiples can, and likely will, come in quickly because of how quickly Fulgent is growing. And, as we’ve seen in the first half, that growth will be accompanied by bigger margins as well.
Indeed, analyst estimates for next year suggest almost $2 in EPS, and a more reasonable 27x price-earnings multiple. Oppenheimer just initiated coverage with a $75 price target for FLGT. And down the line, Fulgent could easily be an acquisition target for the likes of Quest Diagnostics (NYSE:DGX) or IDEXX Laboratories (NASDAQ:IDXX).
What’s important to note about that case is that it has nothing to do with where FLGT traded in December, or in March. Investing is not about the past, but the future. And the future looks awfully bright for Fulgent Genetics, and Fulgent Genetics stock.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.