Zomato may be on discount

there’s an old adage, ‘when it rains it pours’. that’s something investors in new age stocks, most of which made their market debuts during last year’s rally, and perhaps investors new to the market overall are getting familiar with. on February 14, the stocks of Zomato, Paytm, Nykaa, and a dozen other recently listed companies touched their lifetime lows, marking a rapid descent. Zomato, for example, currently sits at less than a 10% premium to its issue price of Rs 76/share just over six weeks into a year it began at a Rs 141/share (85% higher than issue price).

is this just a reflection of the negative market sentiment or is there more at play?

growth slows down

in its recently declared results for Q3 FY22, Zomato reported a sharp decline in consolidated net loss at Rs 63 crore vs Rs Rs 352.6 crore in the year-ago period and Rs 429 crore in the preceding quarter (Q2 FY22). however, it was still given the thumbs down by investors who sent its share plunging 9% in the subsequent trading session. this was because a look under the hood revealed that the narrowing was due to a one-off gain of Rs 316 crore from the sale of its stake in Fitso. 

what’s more, its gross order value (GOV) for Q3 was almost level with that for Q2, only growing around 1.5% to Rs 5,500 crore. what drives investor interest in internet-based companies is the prospect of rapid growth, and when such firms falter on that path even for a single quarter, they are likely to be punished in the markets.

competition stiffens

meanwhile, privately held competitor Swiggy which recently raised a fresh $700 million at a valuation of over $10 billion, is fighting Zomato tooth and nail. it is rumoured to be acquiring Dineout for somewhere between $150 - $200 million to take on Zomato’s dine-in offering. it is also looking to cross swords on the BNPL front.

but more importantly, it is focused on the ‘quick commerce’ segment, i.e. on-demand delivery of grocery and other items with an ideal target delivery time of under 10 minutes. the winner of this segment also enjoys the added benefits from tried and tested methods of private label products which offer higher margins. Zomato will be no pushover though, with a $400 million warchest set aside for the segment.

the negative market sentiment due to anticipated interest rate hikes by the US Fed and a potential conflict in Ukraine have only exacerbated the bad news of slowing growth for Zomato and similar stocks. the markets, however, are just as quick to forgive as they are to punish. a rebound in growth on the back of its core business or any of the new initiatives could just as well see its stock make rapid upward strides.