Ordinarily, an aspirational company like Zomedica (NYSEAMERICAN:ZOM) would draw skepticism. Priced at around 64 cents per share at the time of writing, ZOM stock seems like a hefty risk, particularly because throughout long stretches of last year, shares traded hands under a dime.
Moreover, the aspirational label is a literal one. Per the company’s own announcement of its financial results for 2020, management stated that Zomedica is in the “development stage,” thus recording no revenue.
Instead, Zomedia incurred a net loss of approximately $16.9 million or 5 cents per share of ZOM stock.
As I said, in ordinary circumstances, many if not most investors would be turned off by Zomedica, but these are not ordinary circumstances. Nowadays, having a cheaply priced equity unit is enough for folks to take a shot on it.
Unlike other meme trades, though, ZOM stock provides a broader fundamental reason to be optimistic: America’s love for pets.
According to the American Pet Products Association (APPA), we collectively spent $103.6 billion on our furry friends last year. That’s all the more impressive considering the impact of the novel coronavirus.
It appears that not even economic constraints will have us abandoning Fido.
The growth rate on a year-over-year basis was impressive, as well. Against 2019’s pet industry revenue haul of $97.1 billion, the pandemic-disrupted year enjoyed 6.7% growth. This stat compares favorably to the growth seen from 2018 to 2019, which was 7.3%.
The implication of course is that once circumstances fully normalize — whether that happens this year or next — our wallets will open up even more for our four-legged family members. In turn, this will be very beneficial for ZOM stock.
Yes, Zomedica is an aspirational play but there’s theoretically a reason to be optimistic. Nevertheless, investors may want to be cautious.
Millennials a Questionable Catalyst for ZOM Stock
Based on mainstream headlines, the idea of being pensive toward the pet care market appears unreasonable. You only have to do a cursory search to recognize that millennials represent the top demographic for pet ownership. This alone is enough reason to at least think about adding ZOM stock to your portfolio.
Further, millennials matter. Of course, I understand the constant criticism that millennials are a bunch of whining directionless individuals, but the reality is that this demo is the largest generation in the U.S. workforce. Therefore, whether you believe in this demo’s ethos doesn’t matter. They’ve got the numbers and they’ll continue to have the numbers for a long time.
When you combine that with their love for pets, ZOM stock appears to be a no-brainer. So, why did Zomedica shares drop more than 31% during the trailing month?
Part of the reason could be growing skepticism over the underlying company’s actual addressable market. As our own Chris Markoch pointed out, “if the company can capture any significant part of the nearly $3 billion [animal diagnostics] market, buying shares for 78 cents will seem like a steal.”
It’s a very reasonable assumption, except that again, it’s not working out. Markoch was apparently writing about ZOM stock when it was priced at 78 cents. Today, shares are trading hands at closer to 65 cents.
To me, it’s clear that investors are concerned about something and it might be due to the pet diagnostics subsegment being among the weakest. Of the four segments that the APPA covers, vet care and product sales have risen the least in terms of YOY growth.
Therefore, all this talk about millennials truly caring for their pets sounds reasonable based on the headlines we’ve been reading, but the actual sales data seems to contradict this thesis.
A High-Risk, High-Reward Opportunity
Generally, I believe most financial advisors — if they would even consider penny stocks — would state that you should wait for aspirational Zomedica to generate a sales track record before taking the plunge.
I also understand why believers of ZOM stock don’t want to do this.
If you wait for the revenues to come in, the price would have likely soared. In other words, buy the rumor, sell the news.
So if you want to take a bet, know that you’re taking a blind shot that this pre-revenue company may eventually deliver the goods, but the industry data suggests this is a lower-probability gamble; hence, ZOM’s volatility.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.