With the U.S. pet industry reaching a record $99 billion in 2020, we delve into two stocks at drastically different stages of their lifecycles.
The pet industry was booming in 2020 and is forecasted to reach $358.62 billion globally by 2027. This expansion provides opportunities for companies in the space. These two stocks experienced explosive growth in recent times, but will they continue this upward trend or come back down to earth?
Zomedica: Bull vs Bear Arguments
Zomedica (NYSE American: ZOM) is a veterinary health company creating point-of-care diagnostics for dogs and cats founded in 2013. The company is pre-revenue with its first product — TRUFORMA — set to launch later this month and has a roughly $2.4 billion valuation.
TRUFORMA assists in the diagnosis of complex conditions by veterinarians. The vet will obtain a sample, place it on the disposable assay cartridge, and put it into the TRUFORMA machine, where it performs the test in-house within an average of 18 minutes, helping reduce time and costs.
Its business model means that there is a razor and blade opportunity for recurring revenue. It also plans to expand outside of its current focus on five different diagnostic assays with more currently in development.
Although there is little to see on the financial side just yet, the company has $62 million in cash on the balance sheet, which is positive and will sustain operations until 2023. However, the company has no revenues and posted a net loss of $16.9 million in 2020.
Zomedica is one of the companies that has seen its stock price surge over 500% on the back of retail investors on forums like Reddit buying the stock. This will likely cause the stock to be highly volatile, at least in the short run.
Another glaring risk to the business is that the company is pre-revenue, and the company’s success hinges on the launch of TRUFORMA. Any hiccups will hurt the stock price.
The company was previously not in compliance with the NYSE listing standards due to its low share price. Although this has been rectified, its share price is still a “penny stock”, and if there is a sell-off it could face these issues again.
Trupanion: Bull vs Bear Arguments
Trupanion (NASDAQ: TRUP) is a pet insurance provider that was founded in 1999 by CEO Daryl Rawlings.
Trupanion estimates that pet medical insurance is a growing $1 billion-plus market opportunity with 180 million pets in North America. This North American market is considerably under-penetrated, with the number of insured pets standing at 1-2% compared to the UK at 25% and Sweden at 40%. Trupanion has also partnered with over 2,300 hospitals and 10,000 veterinarians. It also has software in many clinics, which allows for claims to be paid in minutes and decreases friction.
Trupanion has consistently grown revenue, with revenue of $502 million in 2020, an increase of 31% year-over-year (YoY). The number of enrolled pets was 862,928, an increase of 33% from 2019 with a monthly retention rate of 98% and increased lifetime value. The majority of its revenue is subscription-based and provides a steady stream of income. The company is also heavily investing in its business with a 35% return on capital.
One significant risk is that the penetration rates in the U.S. may not reach the levels seen in other countries. Although it has grown consistently over the last decade, investors should keep an eye on the number of enrolled pets. Trupanion was also unprofitable in 2020, reporting a net loss of $3.5 million.
Which stock is a better buy right now?
While Zomedica may not be a bad investment and there is certainly an upside opportunity, there are many unknowns at this stage. The stock is up over 600% year-to-date, and a successful product launch may already be factored into the price. Trupanion, on the other hand, is a proven performer with plenty of room left to run and is a better buy right now.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.