It’s not that Zomedica is necessarily a bad pick. The chances of long-term success, though, are higher with another stock.
Feb. 24, 2021
This article originally appears on The Motley Fool, written by Keith Speights.
Zomedica (NYSEMKT:ZOM) is sizzling hot right now. Shares of the veterinary health company have skyrocketed close to 800% so far this year after catching the attention of the Reddit group WallStreetBets.
Unlike some of the stocks favored by the WallStreetsBets community, Zomedica appears to have improving business prospects. The company plans to launch its TruForma point-of-care diagnostics platform in late March. But I think there’s a pet stock that’s a better bet for investors than Zomedica.
An established leader in its niche
Trupanion (NASDAQ:TRUP) ranks as an established leader in its niche market — medical insurance for cats and dogs. As of the end of 2020, the company had nearly 863,000 pets enrolled in its insurance plans. That number reflects a 33% increase from the previous year.
By comparison, Zomedica is hoping to succeed as a challenger in its market. Several big players already compete in the pet diagnostics market, including Idexx Laboratories and Zoetis. Winning market share from these entrenched leaders is achievable but won’t be easy.
From a financial perspective, Trupanion tops Zomedica on pretty much every front. The company generated revenue in 2020 of $502 million, up 31% year over year. Zomedica, on the other hand, doesn’t have any products on the market yet and hasn’t recorded even a penny of revenue so far.
Both Trupanion and Zomedica remain unprofitable. However, Trupanion is getting close to achieving break-even. The company reported a net loss of $5.8 million last year. It also posted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $11.5 million. Zomedica lost nearly as much in the third quarter of 2020 as Trupanion lost during the entire year of 2020.
A clear growth runway
You might describe Zomedica’s growth strategy as tentative. As mentioned earlier, the company plans to launch TruForma at the end of the first quarter. But CEO Robert Cohen wrote to shareholders that this will be “a controlled release phase wherein we slowly begin” selling the system.
Cohen said that Zomedica plans to start off with “at least three assays in a limited geographical market in order to test our distribution system.” By the end of this year, the company could expand into additional geographic regions but only “if market conditions justify such an expansion.”
Contrast those tentative plans with Trupanion CEO Darryl Rawlings’ statement in the company’s Q4 update, “We’re set up well to capture the growing opportunities within our large, underpenetrated market.” Trupanion projects subscription revenue growth of 25% year over year at the midpoint of its guidance range.
The company estimates that its addressable market stands at nearly $32.8 billion. This estimate assumes reaching the 25% market penetration rate for pet medical insurance in the U.K. Currently, the market penetration rate in the U.S. is only 1% with the rate in Canada around 2%.
Better bet
There’s one other factor that should work to Trupanion’s advantage. Large supplemental insurer Aflac (NYSE:AFL) recently bought nearly 10% of Trupanion. The two companies plan to work together to first target the U.S. workplace market then go after the Japanese market. Trupanion didn’t include any impact from its partnership with Aflac in its 2021 guidance. However, expect to see some real fruit from the Aflac relationship beginning in 2022.
Don’t get me wrong: I think that Zomedica could potentially deliver strong growth over the long term. However, my view is that Trupanion is clearly the better bet between these two pet-focused growth stocks.
This article represents the opinion of the writer(s), who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Keith Speights owns shares of Trupanion. The Motley Fool owns shares of and recommends Idexx Laboratories and Trupanion. The Motley Fool owns shares of Zoetis. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.