Zomedica (NYSEAMERICAN:ZOM) has offered both excitement and disappointment to its investors and traders in 2021. Just consider this — the stock opened the year at 25 cents, and at its heights in February it pushed past $2.90. Today, it’s trading around 83 cents. That’s one wild ride.
So before thinking of investing in it at these levels, consider that ZOM stock is a penny stock, with all risks that this means.
Fidelity has published an informative article on the risks of penny stocks. Some key highlights are the following:
- “Penny stocks are typically issued by small companies and cost less than $5 per share.
- “They can garner interest from some investors who want to get in close to a ‘ground floor’ price.
- “Penny stocks carry greater than normal risks, including lack of transparency, the greater probability of loss, and low liquidity.”
With ZOM stock trading under $1 and carrying a market capitalization of $815 million, so it is a textbook example of a penny stock.
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In the same article, other risks mentioned are that penny stocks can have a scant track record, and are often more susceptible to illegal “pump-and-dump” schemes, when groups promote stocks to create a short-term surge, and then smart money sells and a majority of investors are left with stock in a company with very poor fundamentals at a very high price. A classic definition of a stock price bubble.
Penny stocks can also have low liquidity. And as expected, there is the potential to make money investing in penny stocks, though the risks are much higher than investing in more established companies with a long history of financial results.
ZOM stock however does have a lot of liquidity — the average volume according to Yahoo! Finance is over 62 million shares, which should not be considered a problem now as this trading volume is considered to be very good.
What is not very good is the real story behind the fundamentals of Zomedica with a 52-week range of 6.3 cents to $2.91 per share. After a dramatic surge of the stock price to its 52-week high on Feb. 8, 2021, from roughly 35 cents in early January 2021, there has been a huge selloff of 72% from this 52-week high. Why this occurred?
ZOM Stock: Any News That Are Material Now?
Two months ago I wrote another article about Zomedica titled “Zomedica: Love the Pets, But Not the Stock”
My main arguments were that ZOM stock is overvalued and a risky bet on the acceptance of its Truforma platform and that Zomedica needs to build revenue to be taken seriously.
The verdict was “Until Zomedica shows me the money, I plan to stay away. And maybe it can with Truforma. But until then, the stock price is too high on just-beginning sales.”
Ever since then the stock price collapsed to 82 cents per share. The most important question to ask now is whether things have changed and if there is some major news or a catalyst to support the stock.
Business Model: Need to See Results
Looking at the headlines, the first positive news reported is that Zomedica hired Greg Blair as vice president of business development intending to focus on leading acquisition and licensing efforts.
Blair has a lot of experience related to business development, and it is obvious that Zomedica intends to invest a lot in what matters — commercializing its Truforma platform as much as possible. After all, the company needs expansion and a lot of growth to justify its current valuation.
And the decision that the company “announced that it intends to expand its direct sales organization while phasing out its distributor-based sales efforts” is also considered another positive news. The management is in the right direction in terms of business goals, producing sales.
Q1 2021 Financial Results: Lack of Excitement
The veterinary health company recently reported its financial results for the three months ended March 31, 2021. And after analyzing them, I still don’t see any reason for excitement.
For the quarter there was a net loss of about $4 million, and a loss per share of 4 cents. Comparing to the same period one year ago there was a loss of $2.45 million and a loss of 2 cents per share. The company reported about $276 million as cash and cash equivalent.
But one thing I really don’t like is that the revenue reported for the three months ended March 2021 was only $14,124.
And something else I do not like is the massive stock dilution, a very negative factor for the valuation of the stock. The weighted average number of common shares – basic and diluted on March 31, 2021 — was 890,245,654. On March 31, 2020, the number was 118,340,596. So within one year, there was an increase of about 7.5 times in the share count.
Not an increase to ignore. And definitely not one to be happy about.
Commercial Success Is Not Yet Present for ZOM Stock
There is very little commercial success yet for ZOM stock. And with the focus on business development, marketing expenses should increase. That should increase the operational costs of the company. Nobody expects miracles overnight. Eventually, Truforma could be a big hit.
But with very little revenue, no profits, and heavy stock dilution, ZOM stock seems too pricey now. I would recommend avoiding it. I love pets. It is just that from a fundamental perspective I cannot find a single reason to love this stock.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Stavros Georgiadis, CFA 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
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.