InvestorPlace’s Mark Hake estimates Zomedica (NYSEAMERICAN:ZOM) is worth between $1.11 and $1.61 a share. That makes ZOM stock a buy at current prices.
In May, trading around 80 cents, I suggested ZOM stock could return to more than $1 if it continued to grow sales of its Truforma diagnostic platform.
Profits, at this point, are unimportant.
Right now, the company only needs to do one thing: prove Truforma’s got legs with veterinarians across the country and worldwide. If it provides evidence through accelerating sales, the profits will take care of themselves.
Ultimately, I agree with my colleague’s assessment of Zomedica’s true value. Here’s why.
ZOM Stock and the Pet Care Market
InvestorPlace’s Josh Enomoto pointed out some of the numbers that make the pet care industry so attractive in February. For one, pet owners spent $99 billion on their pets in 2020. That’s an awful lot of chew toys, kibble, and visits to the vet.
In addition, Josh highlighted that the global animal diagnostics segment is expected to be worth $2.8 billion by 2024. No wonder Zomedica’s so excited about Truforma.
On the downside, Josh pointed out that were ZOM to grab 100% of that $2.8-billion market; it would have been trading at 0.6x sales based on a market capitalization of $2.15 billion.
However, I would argue that’s faulty logic. In that scenario, I would suggest one should instead hypothesize about the market share Truforma could gain in the diagnostics industry.
Would it be 5% of $2.8 billion? 10%
Let’s assume it gains 5% of the diagnostics market by 2024. That’s $140 million in revenue. Today, it has just $14,124 from the Q1 2021 sales of Truforma. It had none before that. This works out to a compound annual growth rate of 1,063%.
Now, I don’t think it can get anywhere near 5% of the diagnostics market on a global basis by then, but if it hypothetically did, that growth rate is worth a helluva lot more than 0.6%.
In Josh’s article, he mentioned Zomedica’s biggest competitor was IDEXX Laboratories (NASDAQ:IDXX). It has a market cap of $51.8 billion and a price-to-sales ratio of 18.3x.
So, based on $140 million and a P/S ratio of 18.3x, ZOM would have a market cap in 2024 of $2.56 billion. At the moment, it has a market cap of $818.5 million based on 974.35 million shares outstanding as of May 12 and an 84-cent share price.
To go from $818.5 million to $2.56 billion over the next 3.75 years would be a compound annual growth rate of 35.5%.
I’d take that return 100% of the time.
Is $2.56 Billion Realistic?
To figure out the answer to that question, you’d have to know the cost to vets for both the Truforma instruments, cartridges, and related warranty services. It hasn’t said publicly what those costs are.
A Seeking Alpha contributor used an average selling price of $8,750 per unit. For this article, I’ll use this in my calculation.
So, based on $140 million in sales by 2024, it would have to sell, give or take, 16,000 Truforma units and/or cartridges, etc., in 2024. Based on it selling 100 units in 2021, it would have to grow that number, on an annual basis over the next three years, by 443%.
It might seem unlikely, but given the nature of its product, there’s no question that vets are going to be very interested in its point-of-care capabilities for detecting thyroid disease more quickly.
Whether that amounts to 16,000 annual units by 2024 is certainly up for debate.
However, even if it gets to half that total, we’re talking about $70 million in annual revenue. That should more than help support a research & development budget to come up with a second major revenue stream. That way, it’s considered a one-trick pony.
In my last article about ZOM stock, I was a little concerned about the fact it hired a Vice President of Business Development whose claim to fame was that he’d completed more than 40 acquisitions while working at Elanco Animal Health (NYSE:ELAN).
Would he do the same at Zomedica, blowing its large cash position of $277 million, cementing his legacy as a mergers and acquisitions specialist at the expense of shareholders?
I would like to think that’s not going to happen here. Unfortunately, you often don’t know the answer until it’s too late and the money’s completely gone.
The Bottom Line
Assuming Zomedica gets to $70 million in revenue by the end of 2024 and the number of shares outstanding remains around 974.35 million, the share value at that time would be $1.31 [$70 million * 18.3x sales / 974.35 million shares].
That’s a compound annual growth rate of 12.6%. I don’t believe that’s enough for the risk-averse investor even to contemplate buying ZOM.
However, if you’re a speculative investor, it’s fair to say that 84 cents are an excellent entry point for potential long-term gains beyond 12.6%.
Today’s risk-to-reward proposition is about the same as it was in May when I last wrote about Zomedica. To me, ZOM remains undervalued.
By how much? We’ll find out in the next few years.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.