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Could Zomedica Weather a Financial Crisis?
Stock Analysis & Ideas

Could Zomedica Weather a Financial Crisis?

Among the publicly traded securities that received intense bullish interest over the trailing year, few can hold a candle to Zomedica Pharmaceuticals (ZOM), a veterinary health firm. With the company’s focus on innovative, cost-friendly diagnostic and therapeutic solutions, many investors reasoned that ZOM stock could soar well into a post-pandemic market.

Still, at least a few speculators must have been surprised at the sheer robustness of the resultant rocket ride. Trading hands at around $0.07 per share in early November 2020, ZOM stock would go on to hit a closing peak price of $2.70 on February 8, 2021. In a little over three months, early stakeholders saw their portfolios rise by a multiple of almost 40. (See Zomedica Pharmaceuticals stock charts on TipRanks)

Naturally, such a dramatic swing is going to attract attention. Unfortunately for the newcomers though, ZOM stock has been more of a curse than a blessing. Aside from a few short-lived spikes, Zomedica has been on a downward trajectory since that February peak.

While this might tempt the buy-the-dips crowd, prospective traders will want to consider the fundamentals before making a firm decision.

Plausible Backdrop Keeps Hope Alive for ZOM Stock

Generally speaking, financial advisors steer their clients away from penny stocks. Given this particular asset category’s incredible volatility, stakeholders can find themselves struggling against a tide of red ink. Compounding matters further, deeply distressed companies rarely pay a dividend. Therefore, participants receive no reward for holding true on a sinking ship.

Most people understand this risk. However, what Zomedica offers differently from your typical penny stock fare are both a credible business and a favorable sector environment. The company catapulted atop speculators’ radar with its Truforma in-clinic biosensor platform. With Truforma, veterinary professionals can deliver accurate diagnostics at the point of care, saving pet owners time and money.

Further, Americans love their four-legged family members. According to the American Pet Products Association (APPA), total expenditures in the U.S. pet industry market hit $103.6 billion last year. This tally represented a nearly 7% increase against the prior year’s result of $97.1 billion.

Breaking it down, Pet Food and Treats was the largest segment, generating revenue of $42 billion. Next came Supplies, Live Animals and Over-the-Counter Medicine at $22.1 billion. Veterinary Care and Product Sales was third in the order, ringing up $31.4 billion. Finally, Other Services – which include boarding, grooming, insurance and other services outside of veterinary care – contributed $8.1 billion.

Moreover, it’s not just the tremendous sales but also demographics that bolster the speculative thesis for ZOM stock. The majority of millennials are so-called pet parents and this is significant because they’re also the largest generation in the U.S. workforce.

In other words, where millennials go, so goes the market. It’s curious, then, that ZOM stock has so far failed to reach its February peak.

Veterinary Care Neglected

Though young people have embraced pet ownership like no other age demographic, they might lag in one area: long-term commitment.

According to the APPA, industry experts project the end-of-year 2021 sales in total to hit $109.6 billion, up nearly 6% from 2020. That’s the good news. The not-so-great news is that the Veterinary Care and Product Sales segment is projected to increase at the smallest growth rate, at 2.9% to $32.3 billion.

Moreover, this segment is conspicuously small. Experts forecast Pet Food and Treats to increase 5% year-over-year by the end of 2021. Supplies, Live Animals and Over-the-Counter Medicine should increase by almost 6%. Also, Other Services might command a growth rate of 20%.

Put it all together and it appears the pet market caters toward the acquisition of pets and meeting their basic needs. Yet, when it comes to veterinary care, pet owners may be performing a cost-benefit analysis, thus stymieing growth in this particular segment.

At the moment, millennials appear satisfied with their furry companions. However, it remains to be seen whether an outside crisis – for instance, an economic shock – will test this paradigm.

As NPR.org noted more than a decade ago, the Great Recession was devastating for human-dependent animals. With home and job losses collectively mounting, the very same people who took on the commitment of pet ownership abandoned their pledge. It got so bad that the Humane Society urged down-and-out pet owners to “hold on to their pets until the bitter end.”

Of course, nobody can know for certain how people will react if another crisis capsizes the economy. However, the pedestrian growth rate in Veterinary Care revenue relative to other pet segments poses unignorable concerns.

TipRanks’ Smart Score

According to TipRanks’ Smart Score, Zomedica scores a 3, meaning it is likely to underperform the market. The Smart Score is derived from 8 unique data sets, including Analyst recommendations, Crowd Wisdom, Hedge Fund Activity, Media Sentiment and multiple Technical stock factors.

A Great Title That Might Lack Substance

Circling back to ZOM stock, the full context of the pet industry makes this a much trickier trade than it initially appears. True, American consumers of all demographics – and especially the relevant millennials – have embraced pet ownership. Yet they haven’t as much embraced veterinary care, which falls under Zomedica’s purview.

Moreover, pre-pandemic, ABC News reported that 40% of Americans have less than $400 in the bank for emergency expenses. So, what happens should the economy tumble and people have trouble justifying veterinary care? It’s not the most encouraging circumstance for ZOM, which is why investors need to think carefully before proceeding with this stock.

Disclosure: Joshua Enomoto held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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