Why is ZOMATO’s share price rising?
What comes to mind first when we think of ordering food online?
SWIGGY or ZOMATO!
ZOMATO, the food delivery giant, is the focus of today’s story.
It has been a consistent disappointment for investors since it went public, with its price falling by more than 75%. However, recent share price changes have surprised investors, as ZOMATO’s share value has nearly doubled in just 8 months!
This begs the question: how did the share that appeared to have no hope begin to skyrocket in price? Let’s dive deep and try to decode it here.
Let us begin with the big picture! Globally, the food delivery industry struggles to achieve profitability. Take a look at image 1.1: only one of the top five companies in this industry is profitable, and then only with a 5% profit margin. This emphasizes the following two points:
- Profitability is difficult to achieve within this industry.
- Even if a business manages to become profitable, the next challenge is to generate substantial profits.
It’s not just with this company; many new-age technology companies are facing this issue. Consider Paytm. Investors who followed the herd and applied for the company’s initial public offering were stuck with their investments for months, experiencing a more than 50% drop at one point.
Without a doubt, value investors struggled to understand their valuations and how these companies that do not generate a profit can command such high valuations.
However, it appears that the tide is turning. New-age tech firms that were previously focused on blind growth and market share have suddenly realized the value of profitability.
Zomato’s net profit for the first quarter of the current fiscal year was Rs 2 crore, the company announced on August 3. Revenues for the period were Rs 2,416 crore, a significant increase of 70.9% compared to the same period last year. The increase in revenue was attributable to the rebound in demand as inflation moderated and the effectiveness of the platform’s loyalty program. (Refer Image1.2)
As a result of Zomato’s positive financial report, its stock price increased by approximately 17% in just two trading sessions. However, when revenue (Rs 2416 crore) is compared to profits (Rs 2 crore), the ratio is only about 0.082%. This indicates that the profit margin is relatively low, justifying the fact that the profitability ratio has considerable room for improvement.
The next big thing is an acquisition of Blinkit! (Refer image 1.3.)
Blinkit’s gross order value (GOV) is very close to Zomato’s GOV in some large cities where they have an overlapping presence. Zomato believes that Blinkit will drive more value to shareholders than Zomato in the coming quarters.
Revenue per order increased as a result of an increase in commission rates and enhanced ad monetization, while cost per order decreased as a result of operating leverage. Albinder Dhindsa, CEO of Blinkit, stated that more than 20% of the company’s GOV is now derived from contribution-positive stores (as of December 2022) (Source: Inc42)
Zomato’s adjusted revenue from the quick commerce vertical increased 27% to INR 301 crore in Q3 from INR 236 crore the previous quarter, while gross order value (GOV) increased 18% to INR 1,749 crore from INR 1,482 crore the previous September quarter.
Meanwhile, revenue for the Hyperpure vertical, which serves restaurants, increased by 29% in the quarter ended June 30, 2023, compared to the previous quarter of the same period. The increase in the minimum order value threshold, below which restaurants are not permitted to place orders on Hyperpure, which can be attributed to this growth. As a result, smaller, unprofitable restaurants closed, and the average order value on the platform increased, driving revenue growth and improved profitability.
Overall, Zomato’s fundamentals have been improving, which is good news for the stock. However, as previously stated, there is significant room for improvement in terms of profit margins.
Zomato’s stock price is currently gaining strong momentum, but it remains to be seen if this surge will continue and if it will once again reach new all-time highs. Time alone will answer this. So, what are your thoughts on this? Let me know in the comments below!
Well, it’s time to put a full stop to this short story. I hope you learned something new today. If so, please share and like this piece of content with your network in order to spread knowledge and support.
Signing off,
Nataraj Malavade
