After an excellent three-month run, Zomedica (NYSE:ZOM) stock lost a bit of steam after debuting its Truforma diagnostic system. Bulls are taking profits after shares of the veterinary diagnostic and pharmaceutical company went hyperbolic. Year-to-date, ZOM stock is still up over 500%. But the recent drop in price is definitely a test of whether you are in for the long haul with this one.
If you take an objective view, there are things to like and dislike about the stock in equal measure. By its own admission, it has a sizeable addressable market.
Due to the novel coronavirus pandemic, we see a huge increase in the number of companion animals. According to a research report, 11.3 million Americans got a new pet during the pandemic. Nonetheless, now that vaccines are rolling out in large numbers, we will undoubtedly see sluggishness in animal adoption numbers.
The drop in ZOM stock price we saw post-March 16 is a classic case of “buy the rumor, sell the news.” The bears will argue that the company has been around for a while and has yet to impress.
A product launch is an exciting event. However, the performance of the Truforma diagnostic system is up in the air. Hence, during the event, traders took profits and focused their attention on other businesses.
However, a contrarian view is also emerging. As mentioned, the company is targeting a huge addressable market. Plus, Zomedica has managed to raise a lot of equity during this time. The outstanding share capital jumped to 972 million shares from 101.1 million shares in December 2018.
Overall, the company does have a viable product. But we still need more earnings reports to ensure that the company is heading in the right direction.
ZOM Stock and Pandemic Tailwinds
Several obscure names in the biotech space suddenly found themselves thrust into the spotlight after the pandemic last year. Also, major tech giants experienced exponential growth. ZOM stock is one of the net beneficiaries of the pandemic.
Additionally, the veterinary diagnostic company is one of several meme stocks that have taken the investment world by storm. GameStop (NYSE:GME), AMC Entertainment Holdings (NYSE:AMC), BlackBerry (NYSE:BB), and Nokia (NYSE:NOK) grabbed a majority of the headlines, with stocks like ZOM flying under the radar. But these are short-term trends that will eventually give way to financial realities.
Return on assets, return on equity, and ROIC is all in the red for ZOM. The launch of its Truforma platform is a silver lining, though. The machine will allow veterinarians to conduct in-office diagnoses for common diseases affecting canine and feline companions. Diagnostic accuracy is higher because it uses Bulk Acoustic Wave (BAW) technology, which is usually utilized in semiconductor technology used in telecommunication and aerospace industries. This will allow medical professionals to charge higher fees in a quicker time, driving margins upward.
The company has made one sale; to Jason Berg, founder, and president of Guardian Veterinary Specialists, a 29,000-square-foot hospital in Brewster, New York. Zomedica has inked a deal with Miller Veterinary Supply, one of America’s oldest wholesale distributors of pet supplies to veterinarians, to market Truforma.
Miller will concentrate on the eastern and mid-eastern portions of the United States. Zomedica CEO Robert Cohen has said the company aims to become cash flow positive in 2023. It will have to sell a lot of Truforma platforms before that happens. But at least we have a start.
Zomedica Still Has a Lot to Prove
Despite some positive headlines, ZOM stock remains a risky proposition due to a lack of fundamental strength. According to Statista, the global veterinary diagnostics market was worth approximately $2.6 billion and is forecasted to increase to roughly four billion dollars by 2023. Even if the company manages to grab 10% of the market, it will have revenues of $400 million. That gives a price-to-sales of 3.3 times based on the current stock price.
However, as I mentioned in my intro, ZOM has been around for a while now. Investors want to see some solid traction before buying into its story. They want a consistent revenue stream and a robust business model. Until that happens, ZOM will continue to be treated much like any other meme stock, with investors looking to subreddits rather than its financials as to where it will go next.
I would wait for a few more quarterly results before I initiated a position in this one.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.
