1 Penny Stock with Huge Cash Reserves

Zomedica (NYSEAMERICAN:ZOM) is an easily overlooked veterinary health firm because it’s trading at well below $1 per share. In spite of trading at such a low share price, Zomedica has some real assets, both on its balance sheet and in its operating model to attract interest.

So, is Zomedica worth investing in now?

Zomedica Has a Unique Platform

If this is your first time encountering Zomedica, you may not know about its on-site diagnostic tool for vets, called TRUFORMA™.

Equally, those who have researched the company before may have come across its platform, but even they may not be aware that it employs Bulk Acoustic Wave (BAW) technology that provides fast and high precision readings. For example, it can measure cellular functions that can result in higher utility than diagnostics alone.

It’s also one of the very few veterinary companies that applies the diagnostic technique, which creates a competitive advantage that allows it to charge premium prices that lead to higher margins, which historically tend to be above 67% for ZOM.

If it can capture those margins in the diagnostics market that is forecast to grow at 9.8% annually, Zomedica has the potential to claim market share and take a meaningful chunk out of the estimated $2.8 billion market.

The pet market overall is enormous, particularly in the companion animal sector, such as cats and dogs, where it focuses. The global market for pet care is estimated at $235 billion with no signs of stopping in sight.

Is Zomedica Stock Undervalued?

For a company with a share price so close to zero, Zomedica has some tangible assets to support its growth. For one, the balance sheet is rock solid with $28 million in cash and $102.5 million in short-term investments on the books as of Q2 2023. And it’s not like that is particularly offset by high debt, which sits at just $1.4 million. 

The company’s financial stability points to a long runway before further fundraising may be needed, if ever. 

Interestingly, the company’s market capitalization sits at $167 million, so when you factor in liquid reserves of $130 million, the net operations of the company are being valued at approximately $37 million.

Perhaps that’s a fair valuation, but it certainly doesn’t make the company stand out as being too expensive. With $22.4 million in revenues over the past twelve months, Zomedica is trading at just under 1.4x sales.

For a company that’s posted year-over-year growth in the last 3 quarters of 50.9%, 46.1% and 41.8% respectively that sales multiple seems downright cheap.

So is Zomedica stock undervalued? With a price-to-sales multiple of 1.36x and growing revenues north of 40% annually, Zomedica is 44.6% undervalued, at least on paper.

Zomedica Competitive Advantages

There is lots to like about Zomedica beyond its hefty cash reserves that can sustain operations for at least a couple of years, even while posting operating losses of $6 million quarterly.

For one, the top team is highly regarded and consists of industry veterans from both human and veterinary diagnostics companies, such as Robert Cohen, former CEO of Emery Pharma and previous executive at several diagnostics firms. The optics certainly appear that the team has the network and experience to accelerate the company’s market strategy.

But the gem that lies under the corporate umbrella is the patents the firm owns for its TRUFORMA™ technology. These both strengthen its competitive positioning and act as a deterrent to rivals, which over time should lead to higher market share capture.

Time To Buy Zomedica?

We should highlight that Zomedica is very much a stock to buy for share price appreciation. Zomedica doesn’t pay a dividend and is unlikely to do so any time soon, in spite of its high cash levels. The reason for that is its operating losses continue to mount so cash reserves are being allocated to investments in growth initiatives at this stage.

After running a discounted cash flow forecast analysis, we arrive at fair value of $0.29 using a 5-year term and $0.33 on a 10-year time horizon. If those estimates are realized, the upside in Zomedica share price is anywhere from 70% to 94% over that 5 to 10 year period. Either one would suggest Zomedica is a buy for the long-term.

A knock against Zomedica is that its very low share price essentially precludes it from attracting interest from institutions so trading volume is really low, and it’s possible that it fails to spark interest among bigger money investors in the near to medium term.

So, Zomedica may be a Buy but only for the long-term oriented investors who can patiently sit on a position until full value is realized.

Wrap-Up

When it comes to the financials, the pluses and minuses of Zomedica can be boiled down to fast growing revenues and a pristine balance sheet with high liquid reserves contrasting with ongoing operating losses.

Factoring in the cash and short-term investments, it does appear that Zomedica’s market capitalization is low relative to its potential. Trading at price-to-sales multiple of 1.36x while growing 40% a year suggests the company is undervalued if that growth rate persists.

To highlight that point, within 3 years at the existing growth rate, sales would have more than doubled meaning the company would be trading at around 0.7x its forward 3-year sales number. 

As you work through the projections over a 5 year period they get even more attractive and at some point the company simply becomes so cheap that its cash levels exceed its entire market cap. 

No doubt, there are a few instances in history when that has occurred but they are few and far between, and typically reserved for periods of extraordinary turbulence, such as 2008.

For investors considering Zomedica, the key metric to watch is revenue growth rate, and more particularly whether it can be sustained. If so, ZOM appears to be trading at bargain basement prices today.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.