Zomedica (NYSEAMERICAN:ZOM) stock is yet another sign of a market that’s gone nuts.
That’s not to say that ZOM stock should trade at zero. It’s not to say that Zomedica won’t have some success with its coming product launch. It’s certainly not to say that Zomedica is a “pump and dump.”
After all, a “pump and dump,” as commonly defined, usually is led by a small list of unethical and sometimes criminal actors. The target often (though not always) is worthless or close. And the ‘pump’ often is driven by misleading information or, on occasion, outright lies.
I don’t think that description applies to ZOM. The story bulls are telling is true. Zomedica is targeting an intriguing, growing market with a new product. We have no evidence of ill intent among those bulls.
But there are echoes of the “pump and dump” in how this stock is trading. The same is true for GameStop (NYSE:GME) or AMC Entertainment (NYSE:AMC). The “short squeeze” thesis isn’t quite as prominent for ZOM (though it is out there). The mechanics, however, look awfully similar.
We’ve got apparently coordinated buying. We’ve got some help from Redditors. And, as a result, we have a share price pushed beyond what the fundamentals suggest.
The problem in all three cases, and in every other case like it, is that flying so far above the fundamentals can’t last forever. At some point, market gravity kicks in. With ZOM stock up 27x from where it closed on Nov. 9 — three months ago! — that point seems likely to arrive fairly quickly.
Now trading at $2.55, Zomedica now has a market capitalization of $2.14 billion.
That is an absolutely staggering sum any way you look at it. Here’s one way. In July, Zomedica closed on a stock offering that raised $30 million. For that cash, the company sold 187.5 million shares at 16 cents. Each of those shares came with a warrant to buy another share for 16 cents.
In May, it sold 133.3 million shares at 15 cents, garnering $20 million. That offering, too, included warrants on a 1-for-1 basis.
At Feb. 26, 2020, Zomedica had 129 million shares outstanding, and another 29 million warrants and options. The total diluted share count was 158 million.
From that point, even excluding the warrants, Zomedica sold 320.8 million shares for a total of $50 million. That was two-thirds of the company, and including those now hugely in-the-money-warrants, almost three-quarters of the company.
Less than a year later, the market now is valuing that company at $1.5 billion or so (if you want to back out existing cash and the proceeds from further warrant exercises).
To be fair, companies generally issue equity at a discount. That doesn’t mean the stock has to stay at those levels. The “virtuous cycle” at Tesla (NASDAQ:TSLA) is actually a prime example of that fact.
But as incredible as TSLA stock has been, it never rose 27x in three months. Buyers in Tesla’s equity offerings never garnered more than 2,000% returns in less than ten months.
The Market Problem for ZOM Stock
That is an absolutely crazy run. But let’s look at ZOM stock another way.
According to data cited by Zomedica itself, the “diagnostics segment of the global companion animal market” should reach $2.8 billion by 2024.
In other words, if the company’s pending Truforma launch is such a hit that Zomedica gobbled up every dollar of possible revenue three years from now, ZOM stock would be trading at 0.6x revenue.
Obviously, that’s not going to happen. Zomedica is targeting a small slice of the market with assays for thyroid and adrenal disease.
And it won’t have that small slice to itself. IDEXX Laboratories (NASDAQ:IDXX), a $42 billion giant, already offers similar assays. And it has embedded relationships with suppliers and trust with veterinarians that have been established over decades. Zomedica has yet to sell a single product.
This is not a company that is going to be generating significant revenue any time soon, if ever. Yet the rally in Zomedica stock certainly suggests that many investors believe otherwise.
OK, But What About Truforma?
Let’s step away from the numbers a bit, and look at the qualitative case for the Truforma platform ahead of its launch at the end of next month.
The platform certainly is intriguing. It’s an individual, in-clinic, device that can run the required assays. It runs on BAW (Bulk Acoustic Wave) technology which should be able to provide accuracy like that of a laboratory but in-clinic.
In fact, the Truforma device sounds similar to what disgraced startup Theranos promised it would have. The difference is that, unlike Theranos’ Edison, Truforma appears to actually work.
But, again, even if it does work there’s real doubt as to whether the market is big enough. And there’s another issue: Truforma isn’t really Zomedica’s device. The BAW technology comes from Qorvo Biotechnologies, a subsidiary of S&P 500 component Qorvo (NASDAQ:QRVO).
Qorvo is developing BAW for human applications. It let Zomedica tackle the veterinary side. In exchange for the intellectual property, Zomedica must guarantee minimum purchases (the details are confidential). More importantly, the exclusive deal expires after a decade.
So if Truforma is a hit, Qorvo can walk away. In the meantime, Qorvo makes a profit off its units, a profit which comes off Zomedica’s margins.
That aside, Qorvo is worth about $19 billion. Surely, if it saw a massive opportunity here — one worth, say, $1.6 billion — it would have kept it for itself. It would have built out its own sales and marketing teams.
Maybe Qorvo was wrong. But it seemed to draw the same conclusion that’s still supported by the data: Zomedica’s opportunity isn’t big to be worth $1.6 billion.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.