Rationality is coming back to the pricing of Zomedica (NYSEAMERICAN:ZOM) stock.
Investors may have been highly bullish on the prospects of Truforma, the company’s veterinary diagnostics platform. But trading leaps and bounds above the potential long-term upside from this catalyst, it was inevitable shares were going to pull back in a big way.
As I put it previously, buying this wasn’t a bet on Truforma. Instead, it was a bet on continued “meme stock madness.” This recent investing trend hasn’t ended just yet. Yet it’s clear we likely won’t see a full return to the speculative mania last seen in February.
So, what’s the next move for shares? This remains a popular stock among the Reddit trading community. But as latecomers into this “story stock” continue to cut their losses, and the company fails to deliver more game-changing news, expect a continued fall back to where it traded for before the “meme stock” trend.
That is, prices under 40 cents per share, or more than 50% downside from today’s prices. The proceeds from its $173.5 million capital raise may soften the blow. But with plenty of reason for it to sink lower and almost zero reason for it to rebound, there’s no reason to dive in today.
Its Game Over For Speculators in ZOM Stock
Earlier this year, investing trends were fully on the side of Zomedica. It didn’t matter that valuation was out of whack with its long-term potential. It didn’t matter that the company, starved for cash, was dependent on dilutive equity offerings to keep the lights on. To the company’s investor fan base (mainly retail speculators), it was the “story” (that Truforma was on the verge of becoming a billion-dollar product) that mattered.
Yet now, ZOM stock has run out of possible buyers. The first-movers, who hyped it up on Reddit’s r/WallStreetBets and other platforms, have cashed out and moved on. Latecomers to the party who bought in near its highs have likely realized their losses and moved on as well.
With more bailing out of it than entering it, it’s now trending downwards. With this reversal, there’s no reason to chase it out of FOMO anymore. Predictions of Americans plowing their March $1,400 stimulus checks into “meme stocks” also largely failed to come to fruition. Such a move in theory could have given shares another temporary boost.
The “play” with ZOM stock has been the speculative mania around it. Not the prospects of Truforma. Unfortunately, now that it’s again being valued on its underlying business, further downward moves likely lie ahead.
Why Shares Have Much More Room to Fall
Zomedica may have locked down its first Truforma sale last month. But there’s a next-to-zero chance it can quickly grab the level of sales needed to justify its current market capitalization. Yes, you can argue that its still-inflated valuation ($947 million) is based on what Truforma’s sales could be several years down the road.
As a Seeking Alpha commentator recently broke it down, there is a pathway for this company (which has provided little guidance regarding future revenues) to generate over $100 million in sales by the latter half of this decade. But with so many years until it even begins to “grow into its valuation,” do you really want to be buying in at today’s prices?
With this in mind, it’s clear why one accredited investor in the company has already cashed out. As InvestorPlace’s Vince Martin wrote April 9, Wickfield Bridge Fund, which bought $12 million in Zomedica preferred shares in what could be seen as a “can’t lose” deal, has sold its investment back to the company for $44 million. The fact it cashed out and made as much as $108 million due to its liquidation preference, should tell you all you need to know what the smart money thinks about ZOM stock.
If Zomedica’s valuation today remains inflated, what’s a more reasonable price for the stock? Until we have clearer guidance on future sales, it’s hard to tell. As things remain murky, shares stand a strong chance of falling back to pre-hype prices (under 40 cents per share).
Bottom Line: Wait for Lower Prices (and More Information)
Previously, going long with Zomedica was “meme stock madness” carrying on. Too dangerous to bet against, rolling with the punches was the best call. But now as Reddit speculation has lost its momentum, this stock’s fundamentals are now becoming its primary drivers.
Putting it simply, that’s bad news for ZOM stock in the near term. Stay away for now and wait for lower prices (and more information).
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.