Why Zomato share price has been falling
5 min read . Updated: 29 Jun 2022, 12:35 PM IST
Premium- What are the key factors behind the recent decline in Zomato’s shares? Its recent Blinkit acquisition has something to do with it
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 startups.
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 ₹70.3 to ₹65.9.
The stock fell another 7% yesterday to ₹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 ₹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 $750 m, lower than $1.1 bn in August 2021.
While the company has reduced the previously paid valuation, it is believed that Blinkit requires the additional $250 m investment, which could be spread over 2023-24.
Zomato's total investment in Blinkit may become more than $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 Financial Performance
In its latest quarterly result, Zomato recorded a revenue of ₹1.1 bn which was ₹936 m in December 2021, making an increase of 7.4%.
The company’s net loss widened to ₹2.9 bn from ₹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 peersaround 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.
Equitymaster’s View on Zomato
Here's what Aditya Vora, analyst atHidden Treasurehad 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 $5.2 bn to $9 bn i.e. the IPO valuation.
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 andtech stocks. The same is with many newly listed companies. They don't have a strong enough business to list at the valuations they did.
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 withnew 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.
Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
