ZOM: Why are Shares of Zomedica Surging?

Shares of Michigan-based developmental-stage veterinary diagnostic and pharmaceutical company Zomedica Corp. (ZOM - Get Rating) have been on a tear lately. The company had been a major underperformer since 2016 but captured the limelight with its plans to commercialize its first flagship product, Truforma, last November.

Truforma is a biosensor platform covered by more than 70 patents that assists veterinarians in diagnosing complex conditions in cats and dogs. The stock has blasted up to hit an all-time high of $2.91 on Friday, gaining more than 4,000% since hitting its 52-week low of $0.07 in early November 2020.

On January 25, ZOM announced a distribution agreement with Miller Veterinary Supply, the oldest wholesale veterinary distributor in the United States, to distribute Truforma. As part of this, ZOM plans to commercially launch its first product on March 30. Through the partnership deal with Miller, Truforma will be used by more vets because Miller has a presence from Texas to Maine, concentrated in the Eastern and Midwestern parts of the United States.

Reddit WallStreetBets Saga Continues

In recent weeks, many retail investors have been introduced to the short squeeze, a phenomenon that’s sent shares of struggling businesses like GameStop (GME) and AMC Entertainment (AMC) racing skywards. With both stocks facing heavy trading restrictions on platforms like Robinhood, ZOM caught Redditors’ attention as a new profit opportunity.

The surge might also be attributable to Netflix’s (NFLX) Tiger King lead character Carole Baskin. The star gave ZOM a solid endorsement in a social media video, giving the stock a further boost. However, the endorsement was later proved to be a paid promotion.

Financial Weakness

ZOM has been a public company since 2016, but it has not yet delivered profits. Indeed, its performance has deteriorated over the past four years. The company reported a loss of approximately $12.5 million in the first nine months of 2020. Also, ZOM delivered a $19.8 million loss in 2019, compared to the prior year loss of $16.6 million. Furthermore, only if Truforma the product is launched without any delay will the company start generating positive cash flows in the second quarter of 2021.

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Stretched Valuations

ZOM’s valuation has climbed from $48 million to more than $1.5 billion in the last three months. The company reportedly raised $40 million in January with investors exercising their warrants to buy ZOM stock, and ZOM plans to further raise roughly $25 million via a stock offering and take advantage of its sky-high stock price to boost its cash reserves.

Unfavorable POWR Ratings

ZOM has an overall rating of D, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system evaluates each stock based on eight different categories. Among these categories, ZOM has a Value Grade of F, which reflects the stock’s significantly higher-than-industry forward p/b ratio (36.77 vs. 5.37).

Moreover, ZOM has a grade of D for both Stability and Quality, reflecting its heightened volatility compared to its peers.

ZOM is ranked #209 of 239 stocks in the Medical – Pharmaceuticals industry.

Beyond what we stated above, we have also given ZOM grades for Growth, Momentum, Sentiment, and Industry. Get all the ZOM ratings here.

If you are looking for better stocks in the Medical – Pharmaceuticals industry, click here to see them.

Bottom Line

A 3930% gain over the past three months for a small-cap company like ZOM, whose product is not yet in the market yet, is sure to raise skepticism and concerns. ZOM has a compelling and emerging business case that is riding on a first-mover advantage and has a solid growth opportunity. However, it does seem like ZOM’s stock has run too far on the back of unwarranted product launch optimism.

Even though the company expects Truforma to enjoy strong demand in the veterinary marketplace, it is too soon for investors to bet on the platform’s ability to disrupt the veterinary diagnostics market. So, it is a question of whether the stock can hold this price level or if it is just another penny stock bubble.

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ZOM shares were trading at $2.33 per share on Tuesday afternoon, down $0.37 (-13.70%). Year-to-date, ZOM has gained 910.41%, versus a 4.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...