As you may know, 2020 saw huge growth in the pet industry market and, considering the number of households that own at least one pet, there is still tremendous growth potential in the industry. Recently, Zomedica (NYSEAMERICAN:ZOM) — a veterinary diagnostic company — has become a play on that trend. In fact, although one of the penny stocks, ZOM stock has seen a lot of action in the past few months.
Adding to the heat, Zomedica recently announced the first commercial sale of its new product, the Truforma diagnostic platform. In anticipation of that product’s release, ZOM stock has risen to as high as $2.91 in February. Right now, it’s up 467% year-to-date (YTD). That rise shows that investors are considering Truforma to be something with huge potential. Today, the stock changes hands at $1.33.
However, in my opinion, the current rise is temporary and the hype will cool down soon. I don’t think it’s worth betting on Zomedica for the long term. Instead, there are red flags with ZOM. Here’s why you should watch out.
ZOM Stock: The Current Hype Is Based on Speculation
Driven by optimism from the Truforma launch, ZOM stock experienced a rally in the price recently. While this boost does make the stock attractive, in reality, it is temporary and speculation-based.
For one, the stock is overvalued at its current price. How can you justify a market capitalization of $1.28 billion with no profitability? The stock is very steep, regardless of its future prospects, generating no revenue in 2020 and continuing to burn cash. In fact, it reported a net loss of $16.9 million for the year.
True, Zomedica did manage to raise a total of $217 million during the year which brought its cash to nearly $278 million as of Feb. 26. For a company that reported a loss of almost $17 million, this cash cushion looks positive and healthy. However, if ZOM’s sales increase, its expenditure will also go higher. Plus, there’s no telling if the company can establish customers consistently in the long run.
Additionally, the company recently announced an agreement for the distribution of Truforma with Miller Veterinary Supply. But, between marketing and sales expenses, this could prove to be expensive in the long run. So, ZOM’s cash cushion may not be as comfortable as it seems at first glance.
Yes, Zomedica was close to being delisted recently, so its ability to launch the commercial sale of Truforma is definitely a feat. However, investors must look at it from a different angle. That cash balance may be sufficient for now, but it may not be enough long-term.
Stiff Competition in the Industry
My other concern with Zomedica is where it stands in the veterinary diagnostics market. True, the market is big — but how many veterinary practices will use Zomedica’s diagnostic system in particular? That’s part of what has me skeptical about ZOM stock.
Like any other, this market is not without competition. Yes, the commercial sale of Truforma, its early launch and the distribution deal will help resolve Zomedica’s financial problems in the short term. However, the company still has to stake its place in the market for long-run success.
According to The Motley Fool, the animal diagnostics market will reach $5.4 billion over the next six years, but that projection still does not justify ZOM’s high market cap. The company believes that its platform will achieve high acceptance and success in the market. That’s great. For now, though, it’s also too speculative for me.
The Bottom Line
We’ve seen ZOM stock experience a huge boost lately, but it will cool down soon. In my opinion, the company still has a lot to prove financially. Specifically, I want to see revenue that can justify its high market cap.
Right now, it doesn’t have that. It also has inadequate liquidity. As such, investors should wait and watch where this penny stock is headed. The next few weeks should provide a better understanding about how the market responds to Truforma. At the most, maybe this stock is a good investment, but it comes with a lot of risk.
Hold off on placing your bets for now. Let’s see how things go in the coming months.
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On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Vandita Jadeja is a CPA and a freelance financial copywriter who loves to read and write about stocks. She believes in buying and holding for long term gains. Her knowledge of words and numbers helps her write clear stock analysis.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.