The big story to understand with penny stocks is dilution. Most penny stocks achieve that status through multiple share offerings that include warrants or convertible bond offerings that can be exchanged into equity. They can say it’s about products and growth, and that may be true about the company. But to buy ZOM stock, you have to understand dilution.
Zomedica (NYSE:ZOM) is a medical device company in the animal health industry whose key product offering is a diagnostic tool for veterinarian practices. The companies mission is to “provide veterinarians the opportunity to increase productivity and grow revenue while better serving the animals in their care.”
Veterinarian services totaled $29 billion in 2019 according to the American Pet Products Association. Furthermore, the diagnostics segment of that is $4.4 billion and growing at double-digit rates.
The key product the company is taking to market is the TRUFORMA in-clinic biosensor platform. The entire kit essentially allows a vet to receive test results on-site, as opposed to having them sent out to a lab.
With more than 120,000 veterinarians in the country and approximately 30,000 vet clinics, when combined with a suspected $8,000 to $13,000 price tag, the company has high hopes for rapid and profitable growth. The company could generate $50 million in sales in 2022 as a newly hired salesforce ramps up productivity.
Share Growth
Like many startup companies, Zomedica has relied on the equity capital markets to fund its growth. Here is ZOM’s track record of shares outstanding:
Average shares 2018 93.4 million
Average shares 2019 106.3 million
Ending shares 2019 (2/26/20) 128.9 million
Average shares 2020 364.4 million
Average shares Q3 2020 550.5 million
Ending shares 2020 (2/26/21) 947.3 million
Ending shares Q1 2021 (5/12/21) 974.4 million
If there’s a silver lining to a tenfold increase in shares outstanding for a company, the company as of the end of Q1 2021 has $276.6 million in cash on the balance sheet and is well-funded for future growth.
The company had $16.7 million in operating expenses in 2020 and $19.8 million in 2019. As the company ramps up its sales force, the 2021 burn rate could exceed $20 million if revenues don’t grow substantially.
The TRUFORMA product went to market on March 15, 2021, so revenues in Q1 were de minimis at $14 thousand. The company hasn’t given expectations of sales expectations to my knowledge.
Risks
The high selling price for TRUFORMA could be a hindrance to sustainable sales growth. Many vet clinics are mom-and-pop operations or single-vet operations, which don’t have the budget to spend $8,000-plus on diagnostic equipment.
Competition is fierce in the veterinary diagnostic market. Zomedica lists the following companies as competitors: IDEXX Labs (NASDAQ:IDXX), VCA Inc., Zoetis (NYSE:ZTS) and Heska (NASDAQ:HSKA).
Zomedica has a unusual relationship with Qorvo (NASDAQ:QRVO), a technology company that provided the base technology for the TRUFORMA product. The intellectual property was developed by Qorvo and licensed to ZOM.
Also, Zomedica is not a manufacturing company and relies on third-party manufacturers to make the TRUFORMA system.
Valuation of ZOM Stock
As ZOM stock approaches $1, it becomes a $1 billion market capitalization company. Industry leader Idexx trades at 17x 2021 sales, which itself is an outrageously high multiple. Applying half that ratio to a wild guess of $50 million in revenues for ZOM this year would produce a market cap of $375 million.
It’s almost impossible to buy a stock without knowing a reasonable estimate for forward-looking revenues. ZOM is what we call a binary stock; there are likely only two options going forward. You will make 10 to 100 times your money over the next three to five years, or you will lose 100% of your money if the company doesn’t survive.
Although high cash levels may sustain ZOM stock for some time, it remains highly speculative and an extremely risky holding.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA, is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.
