This sharp rally, coupled with a buoyant broader market, has sparked fresh optimism among the bulls, perhaps the worst is behind the stock?
But is that really the case? Could Zomato now be on its way back to its all-time high of just over ₹300 per share? And if it does reach that milestone, can it sustain the momentum, given its already astronomical valuation? The stock’s price-to-earnings (PE) ratio currently stands at a staggering 480.
Does it make sense to stay bullish, or is caution the wiser course? Let’s dive in.
Some history first
When Zomato first listed, sceptics had clear reasons to expect a crash, and they were right. The stock famously plummeted to ₹40.
That’s when the smart money stepped in.
Here’s an excerpt from one of our past editorials:
“How can Zomato, a loss-making company that burns cash every year, have a market capitalisation of ₹1.4 trillion at its peak? At the same time, Jubilant FoodWorks—maker of Domino’s Pizza and a consistent profit generator—was trading at half that valuation. You may recall the jokes about Zomato trading at the price of a tomato. From a high of ₹160, it fell to ₹42.
We can debate whether Zomato is a good investment, but such stocks must be viewed in relation to peers in India and abroad. At ₹1.3 trillion, not buying Zomato was a no-brainer. But at ₹0.3 trillion, could it be a way to play India’s food delivery market?
In the stock market, everything has a price. The only question is—what’s the right one?”
At those lows, Zomato began to look like a bargain. The company appeared to be getting its act together, and the bulls gave the management a chance to prove itself.
They did, and those brave enough to buy around ₹40 laughed all the way to the bank.
What about the recent correction?
Long-term investors who bought at the lows of 2022 or early 2023 likely aren’t too worried. But IPO investors who held on through the crash might be feeling a familiar unease.
Between November 2021 and July 2022, Zomato lost about 75% of its value, falling from ₹160 to ₹40. The subsequent recovery was a moment of vindication for those who didn’t sell.
But then came another blow—the stock lost a third of its market cap during a correction from ₹300 to ₹200. Now, with prices bouncing back, some investors may be tempted to shrug it off.
Should they?
We think not. Because cracks are beginning to appear in the growth story.
The challenge facing Zomato
The main concern today is Zomato’s exposure to quick commerce, a key part of its operations via the Blinkit acquisition.
This space has become hyper-competitive. Rivals are expanding rapidly and resorting to heavy discounting and promotions to lure customers—moves that directly impact Zomato’s profitability.
The mounting pressure from competition has clearly weighed on the stock, and it’s shaping Zomato’s future strategy. Even worse, the intensity of this competition shows no signs of easing.
Zomato’s management is now walking a tightrope, trying to protect market share without jeopardizing financial stability.
That’s not the scenario investors had in mind. The market was expecting strong revenue growth, broader expansion, and rising margins—leading to robust quarterly profits.
These expectations were the foundation for Zomato’s triple-digit PE.
Now, however, analysts are adjusting earnings forecasts for Blinkit and Zomato overall. Dalal Street is factoring in rising costs and shrinking margins driven by aggressive pricing.
Looking ahead, Zomato’s medium-term profitability may remain under pressure if customers continue demanding deep discounts and faster deliveries.
Despite strong execution so far, Zomato may need even greater investments and innovation to keep up in this environment.
The case for caution
Quick commerce offers both opportunity and risk. For Zomato, it’s become a major variable in its share price.
As the industry evolves, profits could swing sharply from quarter to quarter. One period could show stellar results; the next could disappoint. This kind of earnings volatility is especially problematic when the stock is priced for perfection.
And that’s precisely the issue. When investors are paying nosebleed valuations, they expect consistency and predictability in performance.
Stock outlook
Often, a stock’s fate hinges on just one key metric. If the market believes the company is making progress on that front, investors tend to stay patient. But if expectations aren’t met, sentiment can shift swiftly—and selling can follow.
Zomato has already gone through such a cycle, with the stock falling 75% in the past.
Will it happen again? Maybe not. The company is arguably in a stronger position today than it was in 2021.
Even so, caution is warranted, especially when the stock trades at a PE ratio of nearly 500.
Happy Investing.
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.
