Food Delivery App Finally Delivering Profits? Here's Why Zomato Share Price is Rising...

I have been smiling more often lately when I unlock my phone these days. Whenever I open my smartphone, there is some cute or quirky notification from Zomato. For example:

"Mere Karan Arjun khayenge." Or "You can flirt with them but we're the one they'll come home. (of course to deliver food)." Or "Urvasi Urvasi take it cheesy Urvasi"

However, this is in stark contrast with Zomato's performance on the stock market.

Zomato's share price has failed to make its investors smile.

After its listing, Zomato's share price has only seen a downtrend. Thrown into dust after listing, Zomato hit its all-time low of Rs 50.4 on 11 May 2022.

It came close to value investor Aswath Damodaran's buy price of Rs 41.

As you can see, experts had already predicted this fall in Zomato's share price.

However, recently, things have started to change.

In the last ten days, Zomato's share price has gone up 26%. This was a fresh breath of air for Zomato investors.

But what caused this change? Read on to know what is causing the unexpected rally in Zomato's share price...

What changed?

When financial statements of a Zomato show an increase in profits or even a decrease in losses, the company's share price increases. However, Zomato is an exception to this as it has huge piles of losses reported over the years.

Zomato reported a loss of Rs 3.6 bn for fiscal 2022. This is 50% higher compared to the losses of the previous year.

The losses at Zomato widened. So why did its share price increase?

Undoubtedly, Zomato's losses increased in 2022, but simultaneously sales have grown. In fact, sales grew at 121% on a YoY basis. Total sales for fiscal 2022 is Rs 46.9 bn.

It should also be noted that adjusted EBITDA loss as a percentage of revenue have decreased in Q4. Total EBITDA loss as a percentage of revenue was 15% for Q4 compared to 19% for Q3.

For Q4 Results, Zomato reported a gross order value (GOV) of record-high Rs 58.5 bn. GOV grew by 6% on a QoQ basis and 77% on a YoY basis.

Average monthly customers for Q4 were 15.7 m, this is again a record high figure. Zomato was able to fetch more customers on a QoQ basis despite reducing marketing expenses.

While the company is still a loss making one, it gave investors some hope by posting higher revenues and improved operating performance.

Owing to this, a host of brokerage houses turned bullish on the stock.

Many brokerage houses changed their rating on Zomato from sell to buy. They expect Zomato's share price to rise in the future as the company chases its way to profitability.

CEO of Zomato, Deepinder Goyal said that Zomato is aiming for accelerated growth, along with a further reduction in losses. He said that they are working on fulfilling the growth and profitability expectations of long-term investors.

Akshant Goyal, CFO of Zomato said that the reduction in losses will be driven by an improvement in contribution margin. He also said that revenue in the next quarter will grow in double digits.

Now these are very encouraging statements given by the top level executives. But will Zomato really be able to achieve all this or is it just an illusion?

Only time will tell.

For now, owing to all these changes, Zomato shares have been on an upward trajectory.

Investment Takeaways

Zomato's financial growth shows that the company is growing. But the increase of 50% in losses is still a cause of worry.

Zomato has incurred a loss every single year over the last six years. There's no guarantee it can turn profitable any time soon.

In the Q4 of 2022, the average order value (AOV) of Zomato was Rs 398. This is only Re 1 higher compared to the last quarter.

Zomato operates in 1,000+ cities but 99% of its revenue comes from 300 cities. 60% of revenue comes from the top 8 cities.

Hence, Zomato's financials do not paint an absolute worry-free picture.

Ace investor Warren Buffett once said that,

Buying a business at a bargain price is great. However, buying a good business at a bargain price is even better.

Hence, it is true that Zomato's shares are available at a low price but is Zomato's business worth buying the shares at this price too?

Of course, an argument can be made that Zomato is a part of a fast-growing industry and has now established itself as a dominant franchise.

Therefore, an investor will have to carefully evaluate and then make the choice whether or not to buy Zomato's shares.

For more details about Zomato, you can have a look at its factsheet and quarterly results on our website.

Stay tuned to this platform to know about many more stories like this.

Here are Links to Some Very Insightful Equitymaster Articles and Videos on Zomato:

• Zomato at the price of a Tomato? A Bleak Future for Food Aggregators
• How Investors Could have Avoided Losses in Paytm and Zomato
• Why You Should Not Buy Stocks Like Zomato in this Market Crash
• VIDEO - Zomato, Paytm vs Microsoft, Apple
• Mutual Fund Schemes Investing in Beaten Down Stocks Like Zomato and Paytm

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...