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Zomedica’s Business Model Is Good, But It’s Still Overpriced

Zomedica Corp (NYSE:ZOM) announced not only results for Q2 on Aug. 11 but also a new business model. So far nothing has been working to advance the sale of its veterinary Truforma instruments. If the new business plan works, ZOM stock might be worth more than its Sept. 2 opening price of 61.25 cents per share.

Persian cat with veterinarian doctor at vet clinic

Source: didesign021 / Shutterstock.com

Moreover, the company updated its exact cash balance, $276.2 million as of June 30. In addition, it said there were 979.7 million shares outstanding as of Aug. 11. That means that Zomedica’s cash per share is 28.19 cents. This represents 46% of its 61.25 cents per share stock price and $600.1 million market capitalization.

That implies that the veterinary instrument business at Zomedica is worth $323.9 million (i.e., $600.1 million – $276.2 million) or 33.06 cents per share (61.25 cents – 28.19 cents). But is the business really worth this amount?

Where Things Stand With Zomedica

The problem Zomedica has is its business model change may be too little too late. For example, sales this past quarter were only $15,693. In fact, in the past six months, total sales were only $29,817. Needless to say, that means that the company is running losses.

On Aug. 11, the CEO, Robert Cohen, who announced on July 6 he will resign as CEO at the end of the year (but keep his board seat), said Zomedica has changed to a “razor/razor blade” model.

Here is how that works. As of July 13, Zomedica has installed 25 Truforma diagnostic machines and secured 41 installation agreements. The veterinary clinics that have the machines pay for the assay cartridges as they use them on their installed instrument. Apparently, this is easier than having to get the clinics to pay upfront for the instruments, at least until two new assays become available.

Moreover, the statement the CEO made went to great length about the number of salespeople and managers that the company has hired. The problem is, so far, there is no indication whether the new business model will really work.

For example, there is a question about financing. How will Zomedica finance and manufacture the Truforma diagnostic instruments without sufficient cash flow from customers? The money from assay cartridges is not likely to be enough to cover the manufacturing costs for the machines.

As a result, Zomedica will have to draw down its cash reserves in the hopes that it can gain enough sales of cartridges over time to cover this. So far we don’t know what that payback period really is.

The truth is that the margins on the cartridges are probably much higher than the margins on the sale of the instruments. In that sense the business plan makes sense. But somehow it has to pick up the cost of the Truforma instruments.

What to Do With ZOM Stock

This basically still leaves ZOM stock owners in a quandary. There is not enough info for investors to make a rational decision. It’s hard to know if the Zomedica business is really worth $324 million or 33 cents per share.

As a result, I suspect that most defensive investors will wait for the stock to fall further so that there is a bargain element. This can be seen by subtracting out the cash value from the market capitalization.

For example, if ZOM stock were to trade down to 40 cents per share, or $391.9 million in market value, then the implied value of the instrument business would be just $115.69 million. That is seen by subtracting $276.2 million in cash from the $391.9 million in market value at 40 cents per share.

Therefore, to be conservative, investors who think the stock is a bargain just because it is selling below a dollar should probably wait a little longer. Without sufficient info, I suggest that the safest thing to do is wait until ZOM stock falls to 40 cents per share or lower.

By the way, this is slightly higher than my previous article where I suggested waiting until ZOM stock was at its cash per share. Now we know that is 28.2 cents, less than half of its 61 cents price today. So suggesting waiting until it hits 40 cents, given its business model change, is a slight recommendation for ZOM stock.

On the date of publication, Mark R. Hake did not hold any position in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

Article printed from InvestorPlace Media, https://investorplace.com/2021/09/zom-stock-has-a-fighting-chance-given-its-business-model-change/.

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