Hypergrowth or profits? These 3 actions do not force you to choose
Many high-growth companies choose to sacrifice short-term profitability in order to generate as much revenue growth as possible. While this trade-off may work well for shareholders in some cases – view any long-term chart of Amazon.co.uk as proof, the lack of profits also tends to amplify the risk profile of the company.
Fortunately, not all hypergrowth companies have to make this trade-off. Three high-growth companies — Scientist Semler (NASDAQ: SMLR), Beyond meat (NASDAQ: BYND)and Searing genetics (NASDAQ: FLGT) — all drive significant revenue growth while generating profits. Here’s why the good times can continue.
Given its market cap of less than $350 million, chances are you’ve never heard of Semler Scientific. This healthcare company makes diagnostic products that help identify peripheral arterial disease (PAD), which is the narrowing of the arteries due to the accumulation of fat. Patients with PAD are several times more likely to suffer a heart attack or stroke, yet 75% of them – up to 12 million Americans – are currently undiagnosed.
This is because health care providers lack a simple, accurate, and quick way to measure blood flow to the extremities. This is where Semler comes in.
Semler sells a product called QuantaFlo, which is a small device that is placed on the patient’s fingers and toes to painlessly measure the flow of red blood cells. Semler’s software then analyzes the data and produces a report in just minutes, allowing doctors to quickly diagnose PAD.
Demand for QuantaFlo is growing as more healthcare providers learn about its benefits. Last quarter, Semler’s revenue increased 60% to $8.9 million. It may not seem like much, but Semler’s costs are so low that the company generated adjusted net income of $3.1 million in the quarter.
Management estimates that up to 80 million Americans could potentially be screened each year with QuantaFlo. This suggests that this company’s hypergrowth days are here to stay.
Beyond Meat, the maker of plant-based meat substitutes, caused quite a stir when it went public last year. Given the hype and newness of plant-based meat substitutes, I thought this company would be a money-burning machine. My gut instinct turned out to be completely wrong.
Last quarter, Beyond Meat’s revenue rose 250% to $92 million. The increase in turnover enabled its gross margin to increase from 19.2% to 35.6%. It was a big enough jump to allow the company to generate a net profit of $4.1 million.
Wall Street thinks Beyond Meat’s hypergrowth and profits are here to stay. Current estimates call for revenue to grow another 75% in 2020 and the business to produce around $0.42 in EPS. With billions of dollars to be wonBeyond Meat may be the next big thing growth stock.
With a market capitalization of around $310 million, Fulgent is another small company that probably goes under most investors’ radar. But don’t let its small size fool you: Fulgent is poised to become a major player in the growing genetic testing market.
Fulgent’s tests identify mutations in genes or chromosomal abnormalities that can be used to diagnose or rule out certain genetic conditions. Fulgent offers single gene testing of approximately 18,000 genes, which is thousands more than most of its competitors. These tests can be used to diagnose more than 7,600 genetic diseases, including cancers, cardiovascular diseases, neurological disorders, pediatric diseases, etc.
Fulgent knows that driving down prices is key to creating demand, which is why the company uses proprietary gene probes, database algorithms, machine learning and next-generation sequencing tools to keep costs low. The company then passes some of the savings on to its customers.
The strategy is working. Last quarter, Fulgent’s test volume jumped 272% to 20,700. This contributed to revenue growth of 84% to $10.3 million, and sales leverage helped expansion of gross margin. The combination allowed Fulgent to produce a net income of $1.5 million.
Exciting for investors, the numbers suggest Fulgent is just getting started. The global genetic testing market is expected to exceed $10 billion by 2022. With management forecasting just $32 million in revenue for all of 2019, Fulgent has plenty of avenues to stay in growth mode for coming years.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.