Animal healthcare is an interesting market sector. In 2013, Pfizer spun out its animal health division, Zoetis (NYSE:ZTS), and the newborn stock proceeded to stomp its parent company into the dirt. Pfizer's stock has gone up 54% since the spinoff, while Zoetis has romped to a 465% market return. (So if Merck or Bayer decides to spin off its animal health division one day, investors might want to pay attention.)

While the pharmaceutical side of animal healthcare has seen robust growth, that's nothing compared to what's happening in the diagnostic sector. The big company here (with a $47 billion market cap) is Idexx Laboratories (NASDAQ:IDXX) -- its stock has zoomed 1,000% over the last decade. But even that pales in comparison to tiny little Heska (NASDAQ:HSKA), which has run up an amazing 2,000% in 10 years.

Animal health stocks are on fire! What's up with that? Let's dive in.

Vet examines golden retriever while family pets the dog.

Image source: Getty Images

Why is Heska stock skyrocketing?

Heska is a tiny company with a $2 billion market cap. So if you reverse the math, you can figure out that Heska was a micro-cap a decade ago. Micro-cap investing is highly risky, and fraught with danger.

On the other hand, a micro-cap that zooms 2,000% higher might be doing something right. And the good news for all the investors who are late to the Heska story is that this company is still very tiny. A stock with a $2 billion market cap might very well pull off another 20-bagger. Idexx, for instance, is now a $47 billion giant. So clearly a sizable market opportunity exists in animal healthcare diagnostics.

ZTS Chart

ZTS data by YCharts

But is Heska's stock actually skyrocketing? While Heska's 10-year chart is amazing, the company had its initial public offering (IPO) back in 1997. And if you look at the company's 24-year chart, it's a completely different story. For most of Heska's history, the stock has been awful. It dropped under its IPO price back in the 20th century, and it's stayed under its IPO price for most of the 21st century. To this day, index funds have dramatically outperformed Heska over the last quarter century.

HSKA Chart

HSKA data by YCharts

Should investors buy a stock that's been a loser for so long? Most of us prefer to buy winners. Having said that, people can change, companies can change, management can change, and circumstances can change. When I look at these two charts, I think, "Something is happening at Heska. This unhappy stock is really starting to outperform."

I suspect the Cuattro acquisition was huge

Back in 2013, Heska acquired a majority interest in Cuattro Veterinary, a fast-growing specialist in high-end X-ray devices for animals. These X-ray devices are top-of-the-line digital products, quite expensive and beautifully designed. As Robert Grieve, the co-founder, chairman and CEO of Heska said in a press release,

We consider the products offered by Cuattro Vet to be best in class...Digital imaging and the long-term archival of imaging studies in cloud-based data centers is one of the fastest growing segments in veterinary medicine. These products are also often the most expensive, marquee investments made by veterinarians. A desired brand and unparalleled performance in this space generates not only a halo effect for our other products, it creates entirely new revenue and growth opportunities for Heska ... 

Veterinarian X-ray device

image source: Heska

One of the founders of Cuattro Vet, Kevin Wilson, joined Heska as president and chief operating officer (COO). A year later, Wilson made the move to CEO of Heska, and he's still in that chair today. The company has long since acquired the rest of Cuattro Vet. In its most recent quarter, Heska reported that its North American lab consumables sales grew by 23.9%, while its North American X-ray division saw sales jump by 91% from a year ago. 

Part of what's causing the stock to skyrocket is the nature of the business. Heska's X-ray platform is digital, which allows vets to store images in the cloud. This creates some nice subscription revenue for the business. And, as predicted, the X-ray sales have also stimulated growth in the rest of the Heska product line. Revenue has jumped from $78 million in 2013 to an estimated $225 million in 2021.

But while X-rays are growing faster, point-of-care lab diagnostics are still the largest part of the business. Heska has 30,000 chemical analyzers installed in vet offices around the world, and over 6,000 X-ray devices installed. And these are platforms, not one-time sales. When Heska sells an X-ray device, or one of its chemical analyzers, and the vets use the devices, it creates future revenue for Heska in the form of service and subscription revenue. This is similar to the Intuitive Surgical razor-and-blades model, and it creates a powerful moat for the business.

While it's true that Heska is unprofitable even with 97% revenue growth, it's also a little misleading. Management has been on an acquisition spree, acquiring three companies in the last year. Prior to the acquisitions, Heska was profitable -- it started making money in 2005. The company expects to make significant inroads selling its X-ray equipment and diagnostic devices to its acquired customers in Europe. 

Despite its fantastic stock performance, Heska is still cheap, at 8 times sales. Mr. Market still prefers Idexx, giving that company a multiple of 17.

The one possible dark cloud I see for Heska is Nano-X (NASDAQ:NNOX), an Israeli start-up that has a digital X-ray device that promises to be far cheaper than Heska's offerings. I'm expecting Nano-X to shake up the entire diagnostic market over the next few years. But I'm impressed with Heska's comeback, and I'm definitely keeping it on a watchlist.

This article represents the opinion of the writer, 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.