Why Zomato Share Price is Falling

Editor's note: Zomato share price crashed 14% intraday today and plunged to its all-time low level.

Now, we know that new-age tech stocks like Zomato, Paytm, Nykaa, etc. have fallen to a large extent due to valuation concerns and due to the global tech stocks selloff.

But what suddenly changed that sent Zomato shares close to valuation guru Aswath Damodaran's buy price?

On Saturday last week, the one-year lock-in period for the pre-IPO anchor investors (promoters and employees) in Zomato came to an end.

After the mandatory lock-in period was over, it appears Zomato became a target for panic selling.

But this is not the only reason why Zomato is falling.

A similar downward movement was seen last month in June 2022. Back then, we wrote about the likely reasons for the downfall.

A lot has happened since then. Read on to find out the reasons for the recent decline in Zomato's share price.

Why Zomato Share Price is Under Pressure

Zomato's customers might be happy they are getting timely deliveries, but investors are quite disappointed.

In the last two trading sessions, Zomato's share price has lost more than 14%.

From a startup that sought to solve the 'hunger' problem to becoming the first Indian unicorn to enter public markets, Zomato's journey so far has been a topsy-turvy ride.

The food-delivery company's listing on Indian share markets opened opportunities for a bunch of young start-ups.

Back in 2021, when Zomato was listed as a public company, everybody welcomed it with great euphoria. It didn't take much time before the company started to face headwinds and faced the volatility of the market.

For the past two weeks, Zomato has been making headlines for various reasons.

On Friday, 24 June 2022, its share price tumbled 6.4%, from Rs 70.3 to Rs 65.9.

The stock is yet again under pressure today and is continuing the downward momentum.

It fell another 7% to fall at Rs 60.45.

What are the key reasons for the fall?

Let's take a look...

#1 Zomato - Blinkit Acquisition deal

Aren't acquisitions and takeovers good for a company's long term growth prospects?

The market seems to think otherwise when it comes to the Zomato - Blinkit acquisition.

Zomato announced on Friday last week after-market hours that it will acquire Blink Commerce, in a share swap deal for Rs 44.5 bn as part of its strategy of investing in the quick commerce business.

According to an exchange filing, the company's board of directors approved the acquisition of up to 33,018 equity shares of Blink Commerce Pvt Ltd from its shareholders.

So what does Blinkit do?

Blinkit is an quick delivery service in India. It was founded in December 2013 and is headquartered in Gurgaon. It was previously known as Grofers.

Grofers changed its brand name to Blinkit on 13 December 2021, in line with its vision to embrace quick commerce.

Currently, Blinkit is a loss-making entity just like Zomato. Losses on top of losses is bad news for the company.

And for this reason, Mr Market seems to think this acquisition will have an adverse effect on Zomato.

However, Deepindra Goyal, Founder and CEO of Zomato, expressed great confidence in December 2021 quarter, and poured around US$ 100 m into Blinkit, considering it the closest to quick commerce with a 10-minute delivery time.

Despite Zomato's investment, Blinkit couldn't keep up with the entry of deep-pocketed players like Zepto and Dunzo into the 10-minute delivery space.

Investors in Zomato are not really pleased with this acquisition as is expected to magnify the company's high operating losses.

The deal values Blinkit at US$ 750 m, lower than US$1.1 bn in August 2021.

While the company has reduced the previously paid valuation, it is believed that Blinkit requires the additional US$ 250 m investment, which could be spread over 2023-24.

Zomato's total investment in Blinkit may become more than US$ 1 bn.

By 2023-24, the quick commerce segment will experience great competition, with Reliance Retail, Tata's BigBasket, Flipkart's Insta, and Swiggy's Instamart having already entered the market.

However, Blinkit complements Zomato's food delivery business, and Zomato's management anticipates significant growth in the future.

The quick commerce market has become extremely competitive these days, and it will take a long time for Blinkit to become profitable.

#2 Lock-in period for IPO investors expired

Update: For a company which does not have promoters, the equity share capital held by the company before IPO is locked for one year from the date of allotment of shares. Zomato is one such company with zero promoter holding.

There are different types of lock-in periods. In Zomato's case, the lock-in period for promoters and employees ended last week.

On 23 July, around 6.1 bn shares of Zomato came out of this mandatory one-year lock-in period.

Share price of Zomato has crashed by 65% on a YTD (Year-To-Date) basis. So it can be seen that the stock was already under a lot of pressure.

Now with the lock-in period expiring, investors went into a selling frenzy mode. According to a report, Zomato witnessed volumes of 85 m shares as of 10:00 AM today.

Also, this was deemed to happen. Last year in August, when the anchor investor's lock-in period ended, a similar thing happened. Anchor investors sold shares of Zomato which resulted in an over 8% fall.

As things stand now, Zomato is currently growing without showing profits, which will take it a long time to turn profitable. The current market sentiment has further dampened sentiment.

Did you know, Zomato is one of the companies which has shown fastest growth in sales, i.e., a fastest growing company?

Check out Equitymaster's stock screener to find the other fastest growing companies.

#3 Financial Performance

In its latest quarterly result, Zomato recorded a revenue of Rs 1.1 bn which was Rs 936 m in December 2021, making an increase of 7.4%.

The company's net loss widened to Rs 2.9 bn from Rs 998 m in December 2021.

Zomato is one of the biggest wealth destroyers of 2022 as it has fallen 56% so far.

It is experiencing severe cash flow issues because its operational costs are significantly higher than its cash inflows.

In fact, Zomato's peers around the world are experiencing the same issue, and tech stocks such as Google, Netflix, Amazon, Nykaa, and others are experiencing heavy sell-offs these days.

Update: Zomato shares are now priced at Rs 48, down 70% from its 52-week high of Rs 169.1 touched on 11 November 2021.

Its current marketcap as of 25 July 2022 stands at Rs 369 bn.

Equitymaster's View on Zomato

Here's what Aditya Vora, analyst at Hidden Treasure had to say about the Zomato and other 'platform' businesses...

• These days, a lot is being spoken about valuing the so call 'new generation business' which have been in existence for barely a decade.
  
  The street is divided on what valuation methods to assign to them. They have carved out an industry in itself - Platform Business.
  
  Take Zomato for example. Its IPO is currently open for subscription.
  
  The management of Zomato acknowledges the fact that discounts are an important part of the business strategy and is likely to continue.
  
  The naysayers have their arguments ready. How can a loss-making business with no time line for profit, be valued?
  
  Also isn't it magical that Zomato's valuations have gone up 75% in 4 months from US$ 5.2 bn to US$ 9 bn i.e. the IPO valuation.

Read the full article here - Zomato: Worth a Bite?

Aditya went a step further and explained why you shouldn't buy Zomato even after its crash.

• Even if Zomato halves from the peak, it's still 40% more expensive than what it was 5 months ago.
  
  A fall of 50% looks good. But if you look at it holistically you are still paying 40% more without any material change in fundamentals.
  
  Now I know, you would say the market moves based on liquidity.
  
  I agree. But this is a time when everybody is talking about tapering and the end of free money era.
  
  I'm sure you would be aware of what is happening in the Nasdaq and tech stocks.
  
  The same is with many newly listed companies. They don't have a strong enough business to list at the valuations they did.

Read the entire piece here: Why You Should Not Buy Stocks Like Zomato in this Market Crash.

Investment Takeaway

Zomato and Blinkit do have synergies that can make investors smile in long run.

While Zomato is proficient in customer acquisition cost (CAC) and last mile delivery, Blinkit can back them up with dark store network, meaning a retail outlet or distribution center exclusively for online shopping, sourcing, and robust technologies.

However, for the short term, this is bad news for Zomato and investors might see this as a burden on their portfolio.

It is difficult to assess the situation as there's not much clarity about Blinkit and the outcomes of the acquisition.

One could argue that Zomato is a part of a rapidly growing industry that has now established itself as a dominant franchise.

That's the problem with new age tech companies. They may have a very bright future where big profits await them. But at present, they are burning a lot of cash.

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

Don't forget to check out the below video where Co-head of Research at Equitymaster, Rahul Shah, analyses Zomato and Paytm and answers which one you should consider buying.

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...