Fulgent Genetics IPO Is Too Expensive

| About: Fulgent Genetics (FLGT)

Summary

Fulgent Genetics provides next generation sequencing services and is growing quickly from a small revenue base.

The company has set its IPO terms and wants to raise $60 million at a valuation of $236 million.

My valuation estimates are in the range of $133 million-$140 million.

I recommend avoiding the IPO stock.

Fulgent Genetics (Pending:FLGT) is a next generation sequencing diagnostics company that has set its expected valuation range for an upcoming IPO.

The company wants to sell up to 5.29 million shares, including over-allotment options to the underwriters, at a price range midpoint of $13 per share.

Net IPO proceeds would, therefore, be $59.9 million and the company would have a fully diluted market cap of $236 million.

In my analysis of Fulgent's IPO, Fulgent Genetics IPO Shows Promise, I was optimistic about the company's prospects due to its strong financial performance to-date.

I withheld a recommendation on its IPO stock until the company's valuation expectation became known.


Company Status

Fulgent is growing top line revenue dramatically, doubling its previous year's tally to reach a current year run rate of $14.8 million.

Gross margin is high, at 64%, and growing, as is cash flow from operations, which generated $1.82 million for the six months ended June 30, 2016.

I also believe FLGT is well positioned in a large and growing market, with estimates reaching $3.6 billion in 2022.

To be sure, Fulgent has plenty of competition, which I detailed in my original post. A $3.6 billion market size will continue to attract plenty of interest.

The company is profitable, after stripping out a one-time financing-related item.


IPO Valuation

The salient question is whether FLGT's stock is worth $236 million at IPO.

I provide two valuation methods below to help answer that question.

Price/Sales Valuation Method

Comparing FLGT to a publicly-held direct competitor, Foundation Medicine (NASDAQ:FMI), FMI currently shows a Price/Sales multiple of 7.41.

Since FLGT is growing revenue significantly faster than FMI, I would assign it a Price/Sales multiple of 9x. Its current annual revenue run rate of $14.8 million multiplied by 9 would, therefore, imply a valuation at IPO of $133 million.

EV/Sales Valuation Method

Alternatively, a post-IPO valuation at Fulgent's proposed valuation would result in an EV/Sales value of 12x vs. 5.2x for FMI, indicating FLGT wants to have an enterprise value of $12 for every $1 of sales.

Fulgent is growing faster than Foundation, so FLGT would deserve an EV/Sales of 7x at most, which would imply an IPO valuation of $140 million.

Based on the two valuation approaches, FLGT should have an IPO valuation range of $133-$140 million, not the company's intended valuation of $236 million.

Therefore, I don't recommend FLGT's IPO stock at its proposed valuation.

It's simply too expensive and I recommend avoiding the IPO.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.