Fulgent Genetics IPO Downward Revision Is A Welcome Change

| About: Fulgent Genetics (FLGT)

Summary

Fulgent Genetics sells next generation genetic sequencing.

The company is executing well in a large and growing market.

It revised downward its expected post-IPO valuation, from $236 million to $176 million.

My current opinion is a CAUTIOUS BUY at no more than $9 per share.

Quick Take

Fulgent Genetics (Pending:FLGT) has revised downward its proposed IPO terms, reducing its share offering from 4.6 million shares at a range of $12 - $14 per share to 4.2 million shares in a range between $9 and $11 per share.

The company is executing well in a large and growing market.

Although the IPO is pricey, I'm bullish on Fulgent's prospects.

My opinion on the new IPO terms is a CAUTIOUS BUY and at a price of no more than $9 per share.

Company Recap

Fulgent is a next generation sequencing company that has developed a proprietary genetics sequencing platform that "integrates sophisticated data comparison and suppression algorithms, adaptive learning software, advanced genetic diagnostic tools and integrated laboratory processes."

In my original analysis of the company and its IPO prospects, I detailed the growing market for genetic sequencing and the company's growing revenues, gross margin and cash flow in my piece: Fulgent Genetics IPO Shows Promise.

However, once the company filed its proposed price range and expected valuation, I shared the opinion that the proposed IPO valuation of $236 million was too high and should instead be in the range of $133 million - $140 million: Fulgent Genetics IPO Is Too Expensive.

New IPO Terms And Valuation

Under the revised terms as filed in its latest S-1 statement, Fulgent is valuing itself at approximately $176 million, assuming the underwriters purchase all of their share options.

This is a $60 million reduction in proposed post-IPO market cap when compared to Fulgent's original prospectus terms.

In my original analysis, I compared FLGT to a publicly-held direct competitor, Foundation Medicine (NASDAQ:FMI), which currently has a Price/Sales multiple of 7.41x.

Allowing Fulgent a Price/Sales multiple of 9x on its current annual revenue run rate of $14.8 million resulted in a post-IPO valuation of $133 million.

Using an EV/Sales method comparable, FMI currently has a 5.2x multiple.

FLGT's multiple, assuming a revised EV of $176 million, would be 8.9x.

Even with the downward valuation revision, Fulgent's price is still a bit rich.

However, its growth prospects and financial performance are strong.

Accordingly, I'm changing my opinion to a CAUTIOUS BUY for the newly revised IPO, but at a maximum share price of $9.

Fulgent has a history of good financial performance and is executing well in a large and quickly growing market.

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.