Zelda Therapeutics Limited (ASX:ZLD), a AUDA$69.45M small-cap, is a healthcare company operating in an industry, which faces key trends such as rising demand fuelled by an aging population and the growing prevalence of chronic diseases. Healthcare analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether ZLD is a laggard or leader relative to its healthcare sector peers. View our latest analysis for Zelda Therapeutics
What’s the catalyst for ZLD’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the previous year, the industry saw growth of 9.22%, beating the Australian market growth of 6.88%. ZLD lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its biotech peers. As the company trails the rest of the industry in terms of growth, ZLD may also be a cheaper stock relative to its peers.
Is ZLD and the sector relatively cheap?
The biotech sector’s PE is currently hovering around 28x, higher than the rest of the Australian stock market PE of 18x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 16.12% compared to the market’s 11.91%, which may be indicative of past tailwinds. Since ZLD’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ZLD’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ZLD has been a biotech industry laggard in the past year. If your initial investment thesis is around the growth prospects of ZLD, there are other biotech companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ZLD fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ZLD has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its biotech peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ZLD’s future cash flows in order to assess whether the stock is trading at a reasonable price.