Zomato: Long-Term Investment or Short-Term Gamble?

Apr 1, 2024

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Zomato: Long-Term Investment or Short-Term Gamble?

I have both Zomato as well as Swiggy apps on my phone.

And to be honest, I am indifferent between the two. Sometimes I end up ordering food on Swiggy and then there are times when I use Zomato.

Having said that, the Zomato app does have better appeal in my view. It comes across as more colourful and youthful as compared to Swiggy.

However, it is not just Zomato's customers who are having a colourful experience.

It seems to be all sunshine and rainbows for Zomato's investors too. The stock is up more than 3.6x from its 52-week lows and looks far from done yet. At this rate, I won't be surprised if it crosses Rs 200 in the near future.

It was not always like this though. In fact, Zomato's rise to its current levels has been anything but smooth. One look at the company's share price chart and you will know why.

The company got listed back in July 2021 and had a bumper opening, listing at a 52% premium to its IPO price. It continued to go higher and touched a high of around Rs 155 per share in another 4 months - a more than 100% gain for the original IPO investors.

However, things started going south for the food delivery major from this point onwards.

The stock price kept tumbling month after month and by July 2022, it had destroyed more than 70% of its wealth from its peak. It traded lower than its IPO price of Rs 76 per share and that too by a huge margin.

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I don't think there was any specific factor responsible for Zomato's downfall. It was more a combination of factors that led to the spectacular wealth destruction in the counter.

Factors like geopolitical crisis, interest rate tightening, end of the mandatory lock in period for employees and pre-IPO investors were some of the key reasons behind the sharp fall.

Then there was the Blinkit acquisition that many felt was not the best use of company's capital especially when Zomato itself was still loss-making.

It was like a steady stream of cockroaches crawling out of the woodwork. You try to kill one and another one emerged right after.

The end-result of this assault was the stock falling below Rs 50 per share from a high of more than Rs 150 just a few months back.

Was Rs 50 a great price to enter the counter, especially when its core business was logging in record sales numbers quarter after quarter?

Well, with the benefit of the hindsight, the answer is a huge 'Yes'.

In a remarkable turnaround of sorts, the share price has taken a massive U-turn and is up more than 250% in the last one year alone.

This is impressive by any stretch of imagination. And I am sure there are some strong reasons behind the stock making such an impressive comeback.

Again, there are a multitude of factors involved. The first good news came in the form of the company reporting profits for the first time in the quarter of June 2023.

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The profit, although small at Rs 20 m, marked a significant departure from a loss of Rs 1.8 bn during the same quarter the previous year. Expansion into tier-2 cities and continuous addition of new cities were some of the other positives.

Well, the good times continued to roll in as the company kept reporting good numbers, riding on the back of its Blinkit acquisition, higher convenience fees, commission from restaurants and few other levers.

These factors combined along with overall buoyancy in the Indian midcap and smallcap space, led to the stock price making a roaring come back and even surpassing the highs reached during the previous rally.

In fact, the stock has now reached a new lifetime high and is currently up 2.4x from its IPO price of Rs 76 per share.

There is no doubt that the Zomato of today is a much better avatar of the Zomato during its IPO.

There's focus on profitability and the company is constantly striving to add new revenue streams. Its competitive position is also stronger than ever.

So, does this mean that long-term investors can now afford to take a look at Zomato as a serious long-term investment or is it still one of those stocks where you buy at the bottom, make your quick 50-100% and move out?

Well, to be honest, to each his own. There are investors who prefer to ignore the past and the present and tend to look solely at the future. And for these kinds of investors, Zomato may make sense as a serious long-term bet.

Then there are those for whom the past and the present performances matter and unless these don't show some definitive trends, they don't get interested no matter how rosy the future.

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I tend to fall in this category.

Zomato has certainly posted better numbers in the last few quarters. However, I still see a small loss as far as the performance over the last 12 months is concerned.

Hence, unless Zomato can assure that it can generate profits on a consistent basis, it's very hard for value investors like me to anoint the stock as a serious long-term investment.

For us, an investment candidate is one where the financial track record is sound, the future is decent if not bright and where the valuations scream an adequate margin of safety.

The way I see it, Zomato at the current price point, fails on the first and the third parameter and perhaps comes out with flying colours as far as the future is concerned.

Therefore, for now, it continues to remain outside my circle of competence. It can be called an intelligent speculation at best based on my own criteria.

Likewise, you need to form your own rules and then decide whether Zomato falls inside the circle of competence defined by your rules.

This process makes investing easier and does away with confusion around stocks like Zomato.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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2 Responses to "Zomato: Long-Term Investment or Short-Term Gamble?"

SURINDER CHETAL

Apr 5, 2024

Zomato: Long term investment story , stock future is decent, margin in past six month has increased. With expansion to tier 2 cities & introduction of Blinkit There is good potential to increase the sales & net profit over next three to four years.

Like (1)

SSGKKUMAR

Apr 2, 2024

PLEASE SEND ME ZOMATO NEXT TARGET PRICE

Like (1)
  
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