On principle, it’s hard not to get excited about anything related to the U.S. pet products and services industry. Americans love their pets — seemingly more so than their human family members. Personally, I think it’s a bit over the top. Nevertheless, it’s not my opinion that matters if folks want to pile into names like Zomedica (NYSEAMERICAN:ZOM). Have you seen what ZOM stock has done lately?
There is a fundamental case for the bullishness in shares. According to the American Pet Products Association, pet owners spent approximately $99 billion on their four-legged friends in 2020 across all pet-related expenditures, ranging from food to veterinary care. That was up from $95.7 billion a year earlier.
The very idea that pet-related revenue would increase 3% during a year that appeared headed for an apocalyptic collapse is almost unfathomable. Yet here we are. So in that respect, I can appreciate why supporters have pushed up ZOM stock.
Still, the performance of Zomedica shares is mindboggling in its own right, perhaps much more so than they really deserve. As InvestorPlace contributor Vince Martin highlighted the shares appreciation earlier this week, focusing on its market capitalization that is “an absolutely staggering sum any way you look at it.”
ZOM Stock Is Fundamentally Risky, to Say the Least
Well, Vince, I’m assigned to write about ZOM stock on the evening of Feb. 10. On this day, shares are priced at $2.55, more than 33% higher than the already ludicrous price point.
Oh yeah, the market cap is now $2.15 billion. For many investors, this is pure lunacy.
Fundamentally, Martin notes that according to Zomedica’s data, the worldwide animal diagnostics segment should reach $2.8 billion by 2024. Assuming that the company’s diagnostics division “gobbled up every dollar of possible revenue three years from now, ZOM stock would be trading at 0.6x revenue.”
However, that’s unlikely to occur, in large part because industry heavyweights like IDEXX Laboratories (NASDAQ:IDXX) are also targeting the same market subsegment. And to Martin’s other argument, there are questions whether the diagnostics sector is large enough to support such outlandish valuations for ZOM stock.
Logically, the counterargument about the market size concerns is what I mentioned above: Americans love their pets and will do anything for them. But how true is this resolve?
To be completely transparent, I’ve made arguments in the past about the resiliency of pet-based investments; there’s a real chance that this sector could be recession proof. As well, we can’t forget that our furry friends represented valuable companionship during the Covid-19 lockdowns. We will never abandon this unconditional love, right?
Unfortunately, if the Great Recession is anything to go by, the answer is dishearteningly “yes” — it’s very possible that we can forget. When families started to lose their homes, NPR reported that many were “forced to give up their pets for adoption.”
The situation got so bad that the Humane Society recommended that pet owners “hold on to their pets until the bitter end.” From an emotional perspective, I can understand the sentiment. Just because “a family loses its home doesn’t mean that the family’s pet should be forced to lose both a home and a family.”
BOGO Before FOMO or YOLO
I always like a good deal. Therefore, it’s always a pleasure when I’m shopping somewhere, and I see a buy-one-get-one (BOGO) free deal on products I buy regularly. Even if I’m stacked up, I’d take advantage of it because I’ll want it in the future.
In my opinion, that’s the way you should approach ZOM stock, whether you have a fear of missing out (FOMO) or abide by a you-only-live-once (YOLO) philosophy. Yes, shares could jump higher from here. But how would you feel if shares were severely discounted? Using the present price as an anchor point, it’s very possible that you can enjoy a relative BOGO on Zomedica in the future.
Indeed, it’s likely that the fundamental narrative for ZOM will worsen rather than improve. Sure, maybe we learned the lesson from the Great Recession and that we won’t abandon our pets this time around. However, economic pain means that we’re going to skimp out on pet health care – I mean, we can barely afford human healthcare!
Therefore, ZOM stock occupies one of the riskiest segments of the broader pet services market. I certainly don’t want to pay ridiculous multiples under that context.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.