The recent stock market correction has been bad news for high-flying stocks. That includes “meme stocks,” like Zomedica (NYSEAMERICAN:ZOM). Some of the wind has been knocked out of this pet diagnostics play, but it could be premature to say it’s all downhill for ZOM stock from here.
With investors overestimating the future success of its Truforma pet diagnostics product, you should avoid this stock on valuation alone.
Even though the bull case for Zomedica remains shaky at best, it may take time for the bear case to play out as investors continue to ignore valuation concerns.
So, does that make shares a buy? Not so fast. The red flags haven’t affected Zomedica yet, but it won’t take much to send this cratering back to past recent price levels. Something as simple as the continued stock market downturn or negative news on Truforma might do the trick.
In short, don’t mistake Zomedica holding steady for its stock being a less risky opportunity. Weighing its big downside risk against the possibility of minimal gains from here, the best move is to stay away for now.
ZOM Stock and Its Shaky Bull Case
Since hitting highs nearing $3 per share last month, the hype behind Zomedica has admittedly cooled in recent weeks. Yet, while speculative frenzy has come down, there’s still a lot of investor enthusiasm behind it.
Some may see this as a good thing. However, I see it as a sign that hype, not substance, is backing up this stock.
Granted, there’s little evidence that Truforma will be a commercial flop, but investors continue to overestimate the possible extent of its commercial success.
In other words, the current price of ZOM stock goes way beyond how much this company could reasonably grow in the coming years.
I broke this down in my last article on Zomedica. Even in a scenario where Zomedica grabs the majority of available market share, in a pet diagnostics market that grows severalfold from where it stands today, a reasonable valuation of this stock is still well below today’s prices.
Admittedly, that’s a bit of a mouthful. Putting it more simply, justifying Zomedica’s valuation requires a staggering amount of mental gymnastics. The larger point is it won’t take much to shift investor sentiment in the wrong direction.
Zomedica Is Riskier Than It Looks Right Now
Recent news out of Zomedica hasn’t been needle-moving. Sure, retiring outstanding preferred shares was positive. Swapping them for $44 million worth of common stock was a cagy move. This was especially true given that the terms of the shares were punitive to the company (including a requirement to pay the holders a 9% royalty on sales).
It’s going to take more news on Truforma for investors to jumpstart Zomedica stock. This may limit more gains in the near-term. Yet, investor impatience alone won’t be what fuels another downward move for shares.
Investors have yet to fully price-in the dilutive impact of the company’s $173.5 million secondary offering. However, this too may not push ZOM stock well below $2 per share. General hype over Truforma, along with hope for another round of “meme stock mania,” is keeping the stock steady.
That doesn’t make Zomedica any less risky. Those buying the stock at today’s inflated prices, even as markets have shrugged off its many concerns, are still taking on disproportionate risk relative to possible gains.
A continued move lower for the overall stock market could send this and other “meme stocks” back to earth. So could an unforeseen negative development relating to the commercial release of Truforma.
Bottom line: the market’s current indifference to dilution and valuation concerns doesn’t make this stock any less risky.
Bottom Line: Look Elsewhere
Those who missed out on Zomedica back when it traded for less than $1 per share may still be kicking themselves. Yet, while the stock’s sideways trading may appear a tempting entry point, don’t fall for it.
With investors so far not too concerned about its inflated valuation and recent heavy dilution, it’s hard to see it falling back to prior price levels out of the blue.
Nevertheless, with little reason for it to rally further, but with it still vulnerable to another move lower, skip out on ZOM stock, and look elsewhere for high-risk but high-potential opportunities.
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.
