It’s been a phenomenal start to the year for Zomedica (NYSEAMERICAN:ZOM). Year to date, ZOM stock is up 793%. Yet, at $2.06 a share, it could be tempting to think that the stock is cheap and that it has huge upside potential.
The immediate future of Zomedica hinges heavily on a single about-to-launch product — Truforma. The company describes Truforma as a biosensor platform intended for helping veterinarians in diagnosing complex conditions in cats and dogs.
However, as I’ll discuss below, while Truforma is a truly exciting product, there are a lot of questions to answer. Here’s a look at the pros and cons of buying ZOM stock.
ZOM Stock Pros
Potentially competitive technology: Zomedica has been pitching Truforma as a tool that provides improved test accuracy in a shorter time. That’s possible thanks to the bulk acoustic wave (BAW) technology. The technology is a high-precision solution presently being used to deliver cleaner signals in communications materials — particularly the next-gen 5G-enabled devices.
Zomedica partnered with semiconductor company Qorvo (NASDAQ:QRVO) to bring this tech to the point-of-care veterinary practice for the first time. According to Zomedica, the technology’s high precision means veterinarians could diagnose companion animals for conditions such as thyroid and adrenal disorders without requiring a reference lab confirmation.
Flexible use cases: At launch, the Truforma would support tests for adrenal and thyroid disorders in cats and dogs. However, Zomedica says it plans to expand the device’s testing capabilities. The company announced last September that it has started developing a gastrointestinal testing panel for Truforma. Simply put, more use cases increase the revenue opportunities for ZOM stock.
Lower costs and improved efficiency for veterinarians: If Truforma delivers on the promise of improved test accuracy, it could help veterinarians become more competitive in two ways.
- Quicker, more precise tests mean they can make treatment decisions faster than they traditionally could.
- Adrenal and thyroid conditions have been reported as one of the common conditions in felines and canines. This means that the standard extended process of diagnosing these ailments adds to the overall cost of treating cats and dogs. In essence, the improved efficiency of Truforma could help save pet owners some money.
ZOM Stock Cons
Adoption risks: As mentioned earlier, the short-to-mid-term future of Zomedica depends on the success of Truforma. However, there’s no crystal ball to tell if it will be a hit with operators in the point-of-care diagnostics for cats and dogs. You’ll have to wait and see.
Concerns about Truforma’s addressable market: Some commentators, including InvestorPlace’s Ian Cooper, point at the diagnostic market forecast as one of the reasons to be bullish about ZOM. However, I find those conclusions misleading. Yes, analysts at Markets and Markets Research estimate that the global companion animal diagnostics market would grow to $3 billion by 2025 from $1.8 billion in 2020. That represents a CAGR of 9.8%. There are a few things to note from those forecast figures, though.
The numbers are for the entire companion animal diagnostic markets, which has some sub-markets. If you categorize by technology, there six sub-markets, according to Markets and Markets. They include clinical biochemistry, immunodiagnostics, hematology, urinalysis, molecular diagnostics and others (which, of course, factors other small applications).
The applications of Truforma are limited to the immunodiagnostics sub-market, which isn’t the fastest-growing submarket — molecular diagnostics is. The optimism about Truforma based on the growth forecasts for pet diagnostics then seems excessive.
Strong Competition: Surely, Zomedica would have plans to expand its product offerings over the next few years. But it won’t be a ride in the park for the company. Its products would be competing against established names like IDEXX Laboratories (NASDAQ:IDXX) and Zoetis (NYSE:ZTS).
It’s hard to come by the exact figures of how much Zomedica’s competitors make in the companion animal diagnostics market. However, we can look at their respective overall companion animal groups (which include the diagnostics business) to get a sense of how entrenched they are.
The companion animal business at Zoetis bought in roughly $3.65 billion in 2020 — representing over 50% of the company’s overall revenue. At IDEXX, the companion animal group raked in approximately $2.39 billion in 2020 — which represents 88% of the company’s 2020 revenue. Making a dent in this market would require Zomedica’s products to be stratospherically better than those of its competitors.
ZOM Stock Valuation: At face value, the present $2-ish ZOM stock price looks low compared to the mentioned competitors. IDEXX is trading well over $500 a piece. Zoetis stock price is near $160. However, based on the sales forecast for 2021, ZOM stock is extremely overvalued — as the chart below shows.
Verdict On ZOM Stock
It’s not a hard one to call, honestly. Zomedica is facing an uphill task of making a dent in a market that has some gorillas. Yes, the prospects of Truforma are truly eye-popping. Still, you shouldn’t arbitrarily have a high expectation that veterinarians would adopt the device quickly. It’s a wait-and-see kind of situation. That said, ZOM stock is at best a watchlist candidate at the moment.
On the date of publication, Craig Adeyanju did not have (either directly or indirectly) any positions in the securities mentioned in this article.