When you consider veterinary diagnostics specialist Zomedica (NYSEAMERICAN:ZOM) — not from a financial perspective but from its broader business angle — you can’t help but have optimism for ZOM stock. As you know, Americans love their pets. And that’s not anecdotal — the numbers bear this out.
Back in 2019, the American Pet Products Association noted that the U.S. collectively spent $95.7 billion on our furry friends, up nearly 6% from 2018’s haul of $90.5 billion. And of 2019’s tally, roughly 31% of that (or $29.3 billion) was earmarked for veterinary care and product sales.
On paper, this bodes very well for ZOM stock. Not only do we care emotionally for our animals, but we’re willing to spend top dollar on their health. You couldn’t ask for a better economic backdrop behind Zomedica’s diagnostics tools.
On top of that, pet owners are still spending a lot on their pets, even as the human world falls under extreme pressure. The APPA projected that in 2020, we will spend a record-high $99 billion on pet care and products, despite the financial strains of the novel coronavirus this past year. Companies would kill for this kind of consumer-demand resilience, especially at this trying hour.
In this context, it may come as no surprise that ZOM has been bonkers lately. On a year-to-date (YTD) basis, shares are up a staggering 709%. On a trailing-year basis, ZOM has gained 750%.
However, with such sharp profits, it’s fair to wonder if there’s any room left for this party. After all, since early 2019 through early 2021, the name traded exclusively in penny-stock territory. Today, shares are slightly below $1.90, sporting a market capitalization of $1.77 billion.
While Zomedica might be tempting right now, if you’re thinking about taking a shot, don’t.
The Clock Is Ticking for ZOM Stock
Back in early February, I noted that ZOM stock had a market cap of $1.56 billion. As I’ve mentioned, with a current market cap of $1.77 billion, the valuation increased more than 13% on little-to-no significant news. That’s one sign that you should avoid this pump-and-dump scheme.
Another is that Zomedica’s Truforma diagnostics system, while scientifically impressive, may not be the catalyst that some investors think it is. I stated the following:
“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.”
Suddenly, when you view ZOM stock under the microscope, the narrative isn’t quite as appealing as its glossy marketing literature makes it out to be. And that’s the point — ZOM isn’t skyrocketing because of its viable fundamentals. Instead, many investors (especially those new to the game) are losing any semblance of discipline.
Certainly, meme stocks have captivated the mainstream consciousness, there’s no denying that. However, from a sustainability point of view, the rise of this stock and its ilk speaks to a broader and worrying development.
As a U.S. News & World Report article notes, “…recent research shows that chronic financial stress doesn’t just cause you to make a few bad decisions — it can actually lower your IQ.”
Think about that for a moment. Millions of Americans are under financial stress because of the pandemic. Suddenly, an “opportunity” like ZOM presents itself. Emboldened by its cheap price as well as social media posts — and little else — they dive right in. This stock is surrounded by confirmation bias.
No wonder why Zomedica has traded so wildly. That’s also the reason why you’ve got to get out.
It’s Time to Be Rational
As you know, I’ve been constantly pounding the table on the “Roaring 2020s” while other analysts have shied away. I know trends. And I believe in profiting off of the biggest ones.
And sure, you can absolutely make the argument that pet care is a massively bullish wave. Millennials in particular have gravitated toward pet ownership, providing a long-term catalyst for the industry.
However, even with such tailwinds, not every participant will be a winner. Zomedica is a case where the trading has extended from where ZOM stock deserves to be. While the recent irrationality can keep shares floating higher and longer than expected, you don’t want to be on the bottom of it when they do eventually crash.
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 this article.
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