In recent days, Zomedica (NYSEAMERICAN:ZOM) stock has seen a bit of a rebound. After falling to below $1 per share for the first time since late January, the popular “meme stock” has now gotten back to that price level. But don’t expect this to last for long.
Some die-hard fans of the veterinary diagnostics play may still believe in the prospects for its flagship product, Truforma. Yet, it’s going to take time before this product becomes widely used. Initial sales may not be enough to support today’s stock price.
Even after falling more than 65% off its highs, the stock (with its nearly $1 billion market capitalization) still sports an inflated valuation. As investors further re-assess its true underlying value, expect more downward pressure on shares.
How much downward pressure? Yes, after the company’s heavy capital raises (albeit dilutive), it’s got a more cash-rich now than it was a year ago when shares traded for literally pennies. In short, it likely won’t fall fully back to prior lows.
But with the odds of it seeing big declines outweighs the chance of a full rebound to prior highs, there’s little reason to buy the dip at today’s prices.
It’s Tough to Justify the Valuation of ZOM Stock
When I last wrote about Zomedica, I made the argument that there was a next-to-zero chance that Truforma’s sales would grow fast enough to support the overall company’s current valuation.
My take on this hasn’t changed. Sure, we’ve received news that the company is building out its direct sales force for Truforma. It’s a step in the right direction. But it still gives little indication that there’s massive demand out there for veterinary practices to purchase this product.
Try to look online to see what vets themselves think of Truforma, and your search will yield few results. At best, you’ll find some Reddit threads attesting to its game-changing impact on veterinary medicine. But most, if not all of the discussion, is tied to ZOM stock bulls hyping up the stock. In short, it still seems like it’s speculators, rather than potential end-users, that are more excited about the product’s launch.
Sure, this doesn’t indicate that Zomedica will flop. The initial order of Truforma, from a large veterinary practice, could point to subsequent big-ticket orders. But even if the company generates seven or even eight-figure sales for the product in its initial year, it’s going to not be enough to sustain this stock at $1 per share.
What’s a Reasonable Floor for Zomedica Shares?
Shares may have seen a high double-digit decline from their “meme stock” highs set a few months back. But the bulk of its current valuation remains due to its Reddit-fueled hype. Yes, its popularity among stock speculators active online has declined massively. But there are still many who are hoping Truforma’s initial success proves the stock’s biggest skeptics wrong.
Can they prevail? Again, with it likely taking some time for this product to take off (if it even does), things aren’t going to go from zero to sixty with a fiscal quarter.
As the story behind Zomedica takes longer than expected to play out, some still holding it today will get impatient, and too will decide to head for the exits. As this happens, expect shares to fall.
So, what’s a reasonable floor for ZOM stock? With little clarity regarding its future sales, I’d say a value equal to the net cash on its balance sheet. Following the aforementioned dilutive stock offerings, the company wound up with $277.5 million in cash (as of Feb. 26, 2021).
With approximately 972 million outstanding shares, that gives us a floor of around 29 cents per share. Yes, this may be a bit bearish of a price target. But if pessimism fully kicks in, investors will assign little value to the company’s underlying operations.
The Bottom Line
I remain highly bearish on Zomedica. But I’ll concede that a sudden “rip” in its share price remains within the realm of possibility. The company could announce a game-changing order, which could give the stock a double or even triple-digit percentage boost. After moving more into crypto as of late, retail traders could return to their old stomping grounds, such as this “meme stock.”
Yet, with more pointing to continued decline in its share price, perhaps to as low as 29 cents per share, it’s still wise to steer clear of ZOM stock. It may be worth a gamble once the dust finally settles. But for now, it’s still too early.
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, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.