Zomedica Is a High-Risk Trade, Not a Long-Term Investment

On Nov. 10, Zomedica (NYSEAMERICAN:ZOM) closed at about 8 cents. Now, only a few months later, ZOM stock trades at around $1.90.

Persian cat with veterinarian doctor at vet clinic
Source: didesign021 / Shutterstock.com

In other words, the stock has gained over 2,600% in just the past three months. That is a massive, massive rally.

Now, the fact that it has soared doesn’t alone mean it’s too expensive or due for a reversal. I’ve talked about the dangers of “anchoring bias” before, or using past prices to judge current valuations. A pre-revenue company like Zomedica can see big moves when investors become more optimistic about its future. The company’s nearing product launch could be driving that optimism.

But that said, it does seem like ZOM stock has run too far — and is indeed too expensive. There is some underlying optimism, but that doesn’t appear to be what’s driving it higher.

Instead, traders have found the stock in a big way. Some of them are using social media and other channels to push ZOM higher. Now they’ve pushed it too high — and as we’ve seen of late, that kind of valuation can’t last forever. Quite often, it doesn’t last at all.

The Trading Frenzy in ZOM Stock

There’s no way to look at ZOM stock and argue that its rally has been driven by long-term, buy-and-hold investors. It’s patently obvious that traders are behind the move.

On  Nov. 12, the volume in Zomedica stock was about 15.8 million shares. Given that ZOM traded at about eight cents that day, we’re looking at total dollar trading in the range of $1 million.

On Nov. 13, however, ZOM saw volume of over 253 million shares. Starting that day, in the ensuing five sessions, nearly 1 billion shares changed hands.

Volume settled down until 2021 arrived, when traders again piled in, with some 709 million shares traded on Jan. 5. Then, on Jan. 11 and Jan. 12 combined, ZOM traded over 2 billion shares.

The catalyst for that last instance of enormous volume? Apparently, it was a post by Carole Baskin of Tiger King fame. Someone paid Baskin $299 to tout Zomedica on video-sharing platform Cameo. In response, the stock rose 171% over the two sessions.

The Good News

Admittedly, a long-term investor can look at Zomedica and see some reason for optimism, though. Notably, the company is moving toward the commercialization of its Truforma diagnostic platform. With that platform, the company can offer assays to detect thyroid and kidney disease in cats and dogs.

Meanwhile, the huge rally in ZOM stock has improved its balance sheet. Holders of warrants in the stock exercised quickly as ZOM cleared the exercise price (15 cents or 16 cents, depending on the tranche). Those exercises have added some $40 million in cash to the balance sheet and more exercises are likely to follow.

Additionally, the rally in ZOM above $1 even removed the risk of delisting — at least for now. Without the rally, the company would have probably needed to execute a reverse split at some point. Those can be painful.

So, there is something here. This isn’t a case where traders simply picked a random penny stock with no business and decided to make it soar. There is a case for this stock. But that’s precisely what makes it so dangerous.

The Risks

The problem is that ZOM’s case isn’t particularly compelling upon closer inspection.

For instance, the company keeps talking up its Truforma platform. But the platform is actually built on other companies’ technology. Zomedica has no patents of its own (though it does have four applications pending). So, Truforma sits on licensed technology, which will require licensing fees paid to the intellectual property owners. Those fees, of course, will lower profit margins.

That’s a problem mainly because the market simply isn’t that big. The entire diagnostic market for companion animals should reach about $2.8 billion globally by 2024, according to Zomedica itself. The company is targeting only a tiny slice of that market.

And yet, Zomedica now has a market capitalization of $1.56 billion. According to its November filing with the U.S. Securities and Exchange Commission, there are 564 million shares outstanding but nearly 300 million warrants outstanding as well. Those warrants will bring in some considerable cash, certainly, but they’ll inflate the share count, too.

This company’s addressable market hardly seems big enough to support its valuation, particularly when considering the margin impact of license fees. Even if successful, Zomedica is not going to produce the profit to keep that valuation above even $1 billion.

Long-term investors care about that problem. Traders having fun generally do not. So, the issue is that, at some point, the traders will move on. When that time arrives, ZOM stock is going to give back a huge chunk of these gains.

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On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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