Closing at 69 cents per share on Aug. 26, you could say Zomedica (NYSEAMERICAN:ZOM) is getting back to square one. Shares in this pet health care play saw stunning performance earlier this year, when ZOM stock became one of many penny stocks sent “to the moon” by retail traders. Changing hands for around 35 cents at the start of 2021, it quickly hit prices near $3.
But since then? It’s been a long trip home back to sub-$1 price levels. Now the “meme stock” Reddit craze is seemingly over. Still, you may not want to give this one a hard pass. Instead, as the dust has nearly settled, risk-hungry investors may find merit in taking a gamble with this company, which is in the early stages of commercializing its Truforma pet diagnostics product.
Of course, even when accounting for its ample cash position, Zomedica looks overvalued, given it has a $600 million-plus market capitalization versus essentially zero revenue. So, if it’s still pricey, why consider ZOM?
Well, it may not stay that way. If it slides lower, ZOM stock may be within reach of hitting what I consider a worthwhile entry point (more below). Buying at that level, potential upside may outweigh the risk here.
ZOM Stock: With the Hype Over, What’s Next?
The “meme stock” trend tried and failed to make a comeback in June. Since July, stocks popular with Reddit’s r/WallStreetBets community have by-and-large been trending lower. Sure, ZOM stock just saw a quick pop on Aug. 26, but prices seem to be easing again. Chances are shares won’t be popping on speculative frenzy alone anytime soon.
But does that mean this stock is doomed to continue dropping? Perhaps, back to the literal pennies it was trading for before hype for Truforma first came about? Not necessarily. As seen in statements made by the company in its latest quarterly earnings release, things with Truforma could pick up soon. That’s thanks to the fact two new assays are set to be used with the platform.
This will benefit the company in two ways. First, the assays will help diagnose ailments more accurately and in turn generate more interest in Zomedica’s product. And second, assay cartridges could also provide a recurring revenue stream. CEO Robert Cohen likened this to a razor-razor blade model.
These developments — working in tandem with ZOM’s Customer Appreciation Program (which provides the machine in exchange for a commitment to buy the assay cartridges) — could be key to it hitting higher sales numbers moving forward
Play the Waiting Game
So, the Customer Appreciation Program and the new assay rollout should help boost sales later this year. However, even if that moves sales into the millions, ZOM stock will still be richly priced. As I hinted above, even if you deduct Zomedica’s high cash position ($276.2 million) from its market cap (as of Aug. 27), you get an enterprise value of around $348 million.
Even when using next year’s analyst sales projections ($15.2 million), it’s difficult to justify the current valuation. Again, like I wrote back in July, a more reasonable entry point remains around 35 cents per share.
Why that amount? At that level, downside risk may be minimal. It’s a price not too far from the value of the cash on its balance sheet. Operating in the red, Zomedica may be slowly working through its war chest. But, given that its losses for the June quarter came in at just $4.7 million, it’s going to be a long time before the money runs dry.
So, all told? Waiting for another slide here appears to be the best move.
Don’t Buy ZOM Stock Just Yet
With the “meme stock” craze over, Zomedica’s only going to rally on its own merits. Fortunately, with its aforementioned strategy to boost sales, it may have a shot of finally seeing some success later this year.
That said, you may not want to dive in ASAP. At the current price, the implied value of this name’s operating business remains too high. Yet, if it continues to pull back? Your moment to pounce here could finally emerge.
When it comes down to it, ZOM stock is still pricey. Don’t buy it now, but keep it on your radar in case it hits more reasonable prices around 35 cents and below.
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On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.