After hitting prices nearing $3 per share earlier this month, Zomedica (NYSEAMERICAN:ZOM) stock is pulling back. But, after dipping to the $2 per share price level, are more declines in the cards? Putting it simply, it’s hard to tell.
On one hand, there seems to be more hype than substance backing up this former penny stock’s rapid rise in popularity. The company’s veterinary diagnostic product, Truforma, may be a big hit once it’s commercialized. On the other hand, does this alone warrant the company’s current $1.76 billion market capitalization?
As InvestorPlace’s Will Ashworth wrote Feb 19, the pet diagnostics market is set to grow massively over the next three years. But, to justify its valuation, Zomedica will need to capture a pretty large share of this market, which is set to be worth $2.8 billion per year in sales by 2024.
So, weighing potential versus valuation, what’s the best move for investors looking to enter the stock today? Take your time. Shares may have further runway ahead in the coming years. But, in the near-term, the stock’s more likely to pullback further.
Measuring Risk/Return With ZOM Stock is No Easy Task
Those buying Zomedica today are as much making a bet on the future of Truforma, as they are making a bet that Truforma quickly becomes a widely used veterinary diagnostic product. Why else would this early-stage company sport a nearly $2 billion market cap, when the animal diagnostics market (at it stands today) has annual sales of just $2.57 billion?
But, no matter what kind of “bet” these investors are making, the important part is whether it’s one where the odds are in their favor. That is to say, the potential for shares to gain vastly exceeds the risk shares fall back towards penny stock levels.
Is that the case here? Again, it’s too early to tell. With the company moving forward with Truforma, saying shares have a risk of falling back to their 52-week lows (under 7 cents per share) may be overstating things a bit. But, with today’s valuation pricing in a lot of what this company could be potentially worth by decade’s end, it’s hard to argue ZOM stock has room to double once again.
Why? With shares today trading for a substantial premium to what could be its “best case scenario,” downside risk looks to be vastly ahead of the potential for additional gains.
Shares Trade Well Above Their “Best Case Scenario”
As I wrote previously, ZOM stock is not only richly-priced on its current fundamentals. It’s richly priced relative to analyst sales projections. What do I mean? H.W. Wainwright analyst Swayampakula Ramakanth projects sales of just $53 million in 2030.
To be blunt, taking 9 years to get sales up to $53 million isn’t going to cut it. Investors are pricing this stock today as if its diagnostic business will generate billions of sales 9 years out, not $53 million! Admitedly, this is only one analyst’s opinion. So, what do others see as reasonable projections for Zomedica’s sales a few years down the road?
On Feb 8, a Seeking Alpha contributor broke down possible growth scenarios for Zomedica. Even when assuming a possible “best case scenario” (majority share of a $6.7 billion market) shares are richly priced. Why? Discounting this scenario back to present, the contributor sees shares worth only $1.27 per share.
Granted, this estimate assumes Zomedica’s success is only through Truforma. It doesn’t account for other potential winners in its pipeline. But, back-of-the-envelope calculations like this bolster the case that it’s share price is testament to its “meme stock status,” rather than its strong chances of dominating this market.
Bottom Line: Zomedica Has a Lot to Prove, So Wait for Lower Prices
It’s safe to say I hold a more skeptical view of this stock. But, I’ll concede that this company, if it makes the right moves, and meets its current sky-high expectations, has potential to become a veterinary medical equipment name on par with the leader in this space, IDEXX Laboratories (NASDAQ:IDXX).
For those who don’t know, IDEXX sports a market capitalization of nearly $45 billion. Yet, with its high margin operating business, it supports this valuation on just $2.7 billion in sales. In theory, Zomedica could one day get this point (not in the next ten years, but maybe twenty years out).
That implies an eventual share price well into the double-digits. Yet, this alone doesn’t justify diving into the stock at $2 per share. Zomedica has a lot of work ahead of it before it’s even close to becoming the next IDEXX.
In the meantime, the company still needs to execute the commercialization of Truforma. If it experiences any hiccups along the way, shares could fall back to lower price levels. Reconsider ZOM stock as a buy if that happens. But, for now, hold off buying.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.