The music hasn’t stopped yet for Zomedica (NYSEAmerican:ZOM) stock. The early stage company has been on a tear since last year. Why? Investors are betting that its upcoming veterinary diagnostic product, Truforma, will be a blockbuster success.
Well, there’s more to it than that. The initial excitement for ZOM shares may have been due to its growth potential. But now, chalk up much of its recent stock market performance to its “meme stock” status.
That is to say, the popularity of this stock among users of online trading forums like Reddit’s WallStreetBets is helping to sustain this stock’s epic rally. After surging from mere pennies to over $1 per share in a month, some may have thought things were headed to slow down.
However, as the GameStop (NYSE:GME) “short squeeze saga” comes to a close, penny stocks are coming back in vogue. With the Reddit set bidding up this stock, in what’s more like gambling than investing, shares could continue to head higher.
Until they don’t. It’s unpredictable how long the madness in this and other low-priced stocks can last. With this in mind, diving in today may not be the best move.
ZOM Stock: Upcoming Catalysts Do Not Justify Its Strong Performance
Zomedica shares were already up substantially before the recent move from $1 to $2 per share. Now up more than thirty-fold, why do shares keep on climbing? It’s simple. Those who didn’t buy in early are kicking themselves.
As a result, FOMO is driving up the stock. And the company could go from zero to sixty, as it starts to commercialize the Truforma pet diagnostic platform. But, as our Matt McCall pointed out on Feb. 5, there are plenty of risks to keep in mind. With Truforma’s reliance on licensed technology, Zomedica’s potential profits from this product may be more limited than investors today are pricing-in.
Not only that, with heavy dilution (from both a recent share offering, as well as from outstanding warrants), future gains could be limited. Yet, like many meme stocks, you can point out the red flags and still lose money betting against it. Why? If its short-interest heads higher, this “love it or hate it” stock could be the next one to experience a stock squeeze.
Why It Could Be Déjà Vu All Over Again
In January, many heavily shorted stocks headed to the moon. But, as February plays out, many of these are heading back down to earth. However, while the short-squeeze trade is fading, this name could see some benefit from a retail investor-fueled squeeze.
How? As of Jan. 15, short interest in ZOM stock wasn’t that high (12.8%). But, as it zooms past the $2 price level, more bears may be willing to bet against it. This could be a profitable contrarian trade, if this company’s questionable fundamentals start to matter.
But, as “meme stocks” like this one continue to trade divorced from their fundamentals, who’s to say that will soon happen? Add in the potential for more retail investors to hop on the bandwagon. Put it together, and it’s not out of the question this stock could get up to $3 per share, or even towards $5 per share, before it’s all said and done.
Nevertheless, the possibility of this meme madness continuing is not a good reason to go long on this stock at today’s prices. Going short could be dangerous, especially after the recent market volatility. But, along with scores of other low-priced stocks out there, you risk “holding the bag” with this if you aren’t careful.
Bottom Line: Be Careful, Even if Shares Pull Back
Zomedica may be too risky at today’s $2.50 per share. But, is ZOM stock a worthwhile opportunity if it pulls back to near $1 per share? Not so fast. For sure, the company is worth more now than it was just a few months ago. The commercialization of Truforma and other products will likely result in improved results for its top and bottom line.
However, the company’s total market capitalization ($2.15 billion) more than accounts for this. Even if the share price falls by 50%, it’s still stretched given its potential revenue growth. Per estimates from H.W. Wainwright’s Swayampakula Ramakanth, sales are expected to rise to $53 million by 2030.
In short, even if shares halve from here, they would still trade for more than 20x 2030 sales! That’s a high price to pay for current results, much less results 9 years down the road. Shares have lots of room to fall before they hit a more reasonable valuation.
Bottom line, there’s only one call for ZOM stock: be careful, even if shares pull back from here.
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.
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