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How Massive Scalability Generates Giant Profits

By Matt McCallNov 08, 2019


In March, Forbes magazine released its annual “richest people in the world” list.

Among the top 20 richest people were familiar names: Amazon (AMZN) founder Jeff Bezos, Microsoft (MSFT) founder Bill Gates, Oracle (ORCL) founder Larry Ellison, Facebook (FB) founder Mark Zuckerberg, and Alphabet (GOOGL) founders Larry Page and Sergey Brin.

And there’s one simple, common theme running through that list of people and businesses: SCALE. As someone who specializes in early stage, “venture capital” style investments, scale is the one thing I’m always looking for, too.

Scalability is the ability of a business to massively grow revenues while minimally growing the costs associated with producing those revenues.

Scale is what allowed Microsoft, Amazon, Facebook, Oracle, and Alphabet to return tens – even hundreds – of thousands of percent to their early investors.

If a business doesn’t have tremendous scalability, it’s very unlikely to produce the kind of giant returns I aim to generate as an early stage investor. That’s why I’m always looking to own the next Amazon… the next Alphabet… the next Facebook… the next Microsoft.

Sometimes that means looking beyond U.S. borders at the “Amazon of China” or the “Shopify (SHOP) of China,” as we discussed Wednesday.

However, online retail, social media, and software aren’t the only businesses that can scale quickly and hand you life-changing returns in a short period of time.

Biotechnology is another highly scalable business that can earn investors incredible returns that can soar well north of 100X. Think about it. Once a patented blockbuster drug is developed and gets approved by authorities in the United States and around the world, a biotech company can ramp up sales and rake in huge profits, without having to significantly increase its costs.

Look at how scale helped Amgen (AMGN) skyrocket after its first drug approval in 1989. The stock was dormant for years leading up to the FDA’s approval. After that, scalability was evident in the stock price. From November 1984 to January 2000, the stock rallied an amazing 87,000%!

Many lucrative drug approvals later, Amgen is now shining its light on the next generation of pharma winners. On Tuesday, we discussed how its planned acquisition of Chinese biotech company BeiGene (BGNE) sent the latter’s shares up over 30% in one day.

Now, another up-and-comer has seen an even better leap. And it’s all due to the same wealth-creation magic experienced by Amgen, Amazon, and the other examples we just discussed.

Fulgent Genetics (FLGT) flew 38% higher on Tuesday on big volume after reporting very strong earnings. The results were just what I like to see from an early stage company in a breakthrough trend.

In Fulgent’s case, it’s genetic testing, which is moving out of its infancy and into its growth phase. When we have our genomes mapped, doctors can prescribe and scientists can develop treatments best suited to our specific genes, increasing effectiveness and reducing side effects. I believe health insurance companies will one day require their customers to sequence their genomes.

Fulgent reported record quarterly revenue of $10.3 million, up 85% over last year and easily beating estimates for $8.5 million. It saw a record number of billable genetic tests, too – 20,697, or 272% growth over a year ago. And cost per test, one of the most important growth metrics, fell by 60% from last year, which pushed its gross margin nearly nine percentage points higher. Earnings came in at $0.14 per share, way ahead of estimates for $0.03.

I thought Fulgent’s chief financial officer, Paul Kim, summarized the results well:

We have seen increasing efficiencies across our business which have resulted in ongoing improvements in gross and operating margins. These efficiencies coupled with our increasing scale [my emphasis] resulted in meaningful EBITDA [earnings before interest, taxes, depreciation, and amortization], net income, and cash flow generation in the quarter. We expect to see continued progress as we close out the year.

The report showcased everything we want to see – a growing business helping to revolutionize an industry that is scaling up. The success of Fulgent Genomics and other biotechs shows you exactly why scale is the one thing I always look for in early stage investments.

And the story here is much larger than any single stock. According to research firm iRunway, the U.S. holds about 500 of the world’s genome-related patents, with China in second place at 410. Genomics will be a large driver of future healthcare innovations, and you can see that China is not far behind the United States. Rules are more lax there, so I wouldn’t be surprised if China takes the lead in genome patents.

In the meantime, stay tuned to MoneyWire, where I’ll continue shining a light on the compelling – yet often misunderstood – opportunity in China.

Matt McCall’s MoneyLine Podcast

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