Zomedica (NYSEAMERICAN:ZOM) has lost 30% of its value over the past month. I assume that’s because Reddit investors have jumped off the bandwagon. However, if you’re a speculative investor and have capital that you can invest for some time, I believe you’d be crazy not to buy ZOM stock at its current prices.
Here’s why I believe that.
ZOM Stock Is on Sale
Two things come to mind regarding Zomedica’s share price.
First, some always want a lower price. My wife used to work in retail management. I would hear stories about people bargaining on pairs of shorts that were already 70% off.
There is frugal, and then there is cheap.
In the case of ZOM stock, I believe that it’s falling below its support levels because there aren’t enough buyers of the stock right now. Certainly, the company’s July 6 corporate update didn’t help.
“Zomedica’s flagship product – TRUFORMA® – is intended to have five initial assays to test for adrenal and thyroid disorders, which will be followed by many more assays to address other disease states,” the company’s July 6 press release stated. “Three of the initial assays (TSH, tT4 and Cortisol) currently are available. While waiting for the completion of the fT4 and ACTH assays by its development partner, Qorvo Biotechnologies (“Qorvo”) …”
The company admitted that not all of its tests are currently available. In the meantime, it will continue to meet with veterinarians to educate them about its Truforma platform.
So the tests won’t start generating meaningful revenue for Zomedica until 2022. In the meantime, its expenses from hiring all kinds of talent, including a top-notch sales staff, are rising exponentially. That means larger losses are coming.
With more than $250 million of cash on its balance sheet, Zomedica ought to easily be able to absorb increased losses over the next two to four quarters. Investors shouldn’t worry about the company’s liquidity.
And the retirement of Zomedica CEO Robert Cohen, due to occur at the end of the year, should also not concern the owners of ZOM stock. Cohen joined the company as its interim CEO in June 2020. He was hired to get Truforma to the finish line. Given his years of experience in the medical device industry, the board was wise to hire him.
However, Cohen is 63 years old. He’s approaching retirement age. So rather than committing to getting Truforma in the hands of vets across the country and internationally over the next two to three years, at least,, Cohen will provide his advice as part of the board. Someone younger will be brought in to advance Truforma’s development.
From my perspective, it’s far better for Cohen to step aside today than in 12 months when the company is busily trying to sell Truforma. So this move makes a lot of sense.
I think many interested executives will put their hats in the ring. I’m sure the board and Cohen will find a talented replacement.
Manage Your Expectations
Robert Cohen has a lot to gain from Zomedica’s success. The CEO got 2 million shares of ZOM stock when he signed on in June 2020. Those shares have an option price of 19 cents.
He subsequently received an additional 12 million shares, 6 million of which have already vested. The remaining 6 million shares vest by the end of 2022. Their exercise price is 23 cents.
If ZOM stock, for example, reaches $10 by the end of 2022, Cohen would receive a pre-tax profit of $137 million.
So, 63 years old or not, he’s clearly decided to step aside because it’s the best move for the company and himself.
As I stated in my last article about Zomedica in June, if it reaches $70 million of annual revenue by the end of 2024 and its price-sales multiple is 18.3 times — identical to IDEXX Laboratories’ (NASDAQ:IDXX) current P/S multiple — ZOM stock would have a market capitalization of approximately $1.3 billion. And it would be changing hands for $1.31 per share.
In that case, Cohen would still have a pre-tax gain of more than $15 million.
I believe that’s a reasonable target for investors to aim for. In that scenario, if they hold the stock until 2024, the compound annual growth of their Zomedica shares would be just shy of 18%.
For speculative investors, I think the risk-reward ratio of ZOM stock remains favorable at yesterday’s closing price of nearly 63 cents. But the stock’s owners have to be patient. The revenue from Truforma is going to take awhile to materialize. But when it does, look out; it could be huge.
ZOM stock is not for the faint of heart. However, for investors who can afford to lose their entire bet, it’s worth gambling on.
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.