If you are a shareholder in Fluidigm Corporation’s (NASDAQ:FLDM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures FLDM’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
What does FLDM's beta value mean?
Fluidigm has a beta of 3.38, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, FLDM can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does FLDM's size and industry impact its risk?
A market capitalisation of USD $161.48M puts FLDM in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, FLDM operates in the life sciences tools and services industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap FLDM but a low beta for the life sciences tools and services industry. It seems as though there is an inconsistency in risks from FLDM’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is FLDM's cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test FLDM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since FLDM’s fixed assets are only 11.74% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what FLDM’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You may reap the gains of FLDM's returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into FLDM.
Are you a potential investor? I recommend that you look into FLDM's fundamental factors such as its current valuation and financial health. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. FLDM may be a great investment during times of economic growth.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Fluidigm for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Fluidigm anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.