In a more normal market, the story of Zomedica (NYSEAMERICAN:ZOM) stock might really stand out.
To understand why, let’s do a quick recap. At the end of last year’s third quarter, ZOM stock traded for 7 cents. Owing to a high share count, the company still had a market capitalization of about $40 million. But few investors were paying attention. Volume in October, for instance, averaged roughly $1 million a day.
A little over 7 months later, Zomedica’s 3-month average daily volume is in a range that is 100x as high. The stock was part of a massive Reddit-fueled rally that pushed it from 7 cents to almost $3. That included a 3-day, 233% move fueled by an endorsement by the “star” of a popular documentary — an endorsement that cost $299 over the Cameo platform.
We’ve had, and still have, predictions of a massive “short squeeze” despite the fact that short interest remains muted. (It’s just 7% of the float as of this writing.) We’ve had predictions that Zomedica will revolutionize animal health, despite the fact that the company is, by its own admission, targeting quite a narrow market.
Despite that optimism, ZOM stock is off 70% from its highs. It’s still up 1,100% since the end of October.
It has been a nutty 7 months. Without a joke cryptocurrency soaring, or shares of a video game retailer literally becoming national news, ZOM stock might be one of the weirdest investments of 2021.
Instead, it’s just overvalued.
The Case for ZOM Stock
Pretty much all of the Reddit plays have some sort of underlying bull case. Traders in those stocks aren’t bidding up shell companies or scams.
Zomedica isn’t an exception. There is a potentially interesting story here. The company is building out its Truforma platform, which aims to bring diagnostic testing in-house for veterinary practices.
Commercialization began in mid-March (it was slightly ahead of schedule) when Zomedica made its first Truforma sale to a clinic in New York.
Truforma is starting with only a few assays for adrenal and thyroid disorders. Over time, the company hopes to expand. If it can do so, it can take market share from lab companies — and help pets and their caregivers in the process.
Reddit Problems
That’s the good news. But ZOM stock also shares a number of common attributes among Reddit stocks that have driven declines from late January and/or early February highs.
The first is a bizarre insistence that a “short squeeze” is on the way. It’s worth remembering that actual short squeezes are quite rare. For a stock like ZOM, with minimal short interest and heavy volume, they’re nearly impossible. Most of the “short squeezes” that supposedly drove late January gains actually were driven by option hedging or, more simply, by the sheer fact that a wave of buying was underway.
That aside, investors need to remember what a “squeeze” actually is. It’s forced buying at an unsustainable price. It’s the opposite of a long-term case.
The second problem is simply ignoring valuation. Zomedica has promise, yes. But, thanks to the rally and share sales this year, its market capitalization now sits at $760 million. That’s about 19x where it sat 6-plus months ago, when the commercialization target for Truforma was first announced.
The Devil Is In the Details
The third issue bogging down the case for ZOM is that investors are ignoring the details. Its valuation perhaps doesn’t sound that high. But data cited by Zomedica itself claims that the entire companion animal diagnostic market worldwide will be worth just $2.8 billion in 2024.
Zomedica needs substantial share simply to support that $760 million market capitalization. Its earnings will be lower than some investors might think given that Truforma’s technology is licensed from third parties.
It may not seem like it, given the pullback since late January, but ZOM stock is pricing in an awful lot of success already. And, of course, that success isn’t coming any time soon.
Again, the company has assays only for two conditions. It will take time to do the lifting required to expand the platform — if that plan even works.
That’s still a big if. As far as we know, Zomedica has received exactly one order for Truforma.
No doubt more will follow. But it’s a long way from here to success. And it’s a much longer way to $760 million. I’m skeptical the market will have quite that much patience.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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