Zomato, the Indian food delivery giant, has been the talk of the town since its highly anticipated IPO launch in July 2021. The company, which revolutionized the way people order food in India, faced significant skepticism from investors, The company’s lofty valuation and uncertain path to profitability led many to question whether it was a wise investment. Indeed, Zomato’s stock price plummeted after its listing, raising concerns about its long-term viability. However, in the years since, Zomato has managed to defy these early doubts, showing significant growth in revenue, profitability, and operational efficiency. But as the stock price soars, the question remains—has Zomato become overvalued, and is it still a good investment? Let’s dive into the journey of Zomato and assess its current standing in the market.
Initial Skepticism and Post-Listing Decline
When Zomato listed on the stock market in July 2021, it was one of the most anticipated IPOs in India’s history. Despite the hype, many prominent investors, including Rakesh Jhunjhunwala, expressed skepticism. Jhunjhunwala famously remarked that he would not touch the stock with a “bargepole,” citing concerns over Zomato’s profitability and high valuation. The broader market seemed to agree, as Zomato’s stock price fell sharply from its listing price of ₹76 per share. Within weeks, the stock had lost significant value, leading to a widespread belief that Zomato was overhyped and overvalued. However, the company’s resilience and ability to adapt to market conditions have been truly remarkable. Over the past year, Zomato’s share price has rebounded, currently trading around ₹265.98, reflecting a staggering 169% increase.
The Turnaround: Revenue Growth and Profitability
Despite the rocky start, Zomato began to show signs of recovery. The company’s revenue growth has been impressive, driven by a combination of expanding user base, increased order frequency, and higher average order value. For the financial year 2023-2024, Zomato reported a revenue of ₹7,079 crore, up from ₹4,192 crore in the previous year. This growth was largely fueled by its core food delivery business, as well as the rapid expansion of its dining out and B2B segments.
Perhaps more surprising was Zomato’s journey toward profitability. For years, the company had been burning cash in a bid to capture market share, but it managed to turn a corner in 2023, reporting its first-ever net profit of ₹470 crore for the June quarter of 2024. This marked a significant milestone for Zomato, proving that the company could achieve profitability while continuing to grow at a rapid pace.
Challenges and How Zomato Overcame Them
Zomato’s path to success has not been without its challenges. The company faced stiff competition from rivals like Swiggy and new entrants into the food delivery space. Additionally, regulatory hurdles, delivery logistics, and customer acquisition costs posed significant obstacles.
One of the major challenges was managing delivery costs, which are a substantial part of the company’s expenses. Zomato tackled this by optimizing its delivery fleet and introducing innovations like cloud kitchens, which allowed for faster and more cost-effective service. The company also focused on diversifying its revenue streams by expanding into areas like grocery delivery and B2B services through its Hyperpure division.
Is Zomato Overvalued Now?
Zomato’s stock price has seen a remarkable recovery, currently trading at around ₹265 per share, well above its listing price. This surge has reignited the debate over whether the stock is now overvalued. The company is currently trading at a Price-to-Earnings (P/E) ratio of over 390, which is significantly higher than the industry average. While this high valuation is supported by Zomato’s impressive growth rates, it also raises concerns about whether the stock has run too far ahead of its fundamentals.Many analysts argue that Zomato’s current valuation reflects its future growth potential rather than its present-day earnings. However, others caution that the stock may be priced for perfection, leaving little room for error.
What Are the Experts Saying Now?
In contrast to the skepticism at the time of its IPO, the sentiment around Zomato has become more positive. Several prominent investors have warmed up to the stock, recognizing the company’s strong execution and growth trajectory. However, there is still a divide in opinion. Some experts warn that Zomato’s stock is overvalued and recommend caution, while others see it as a long-term play with significant upside potential if the company can continue to innovate and expand its market share.
Rakesh Jhunjhunwala, who had initially criticized Zomato’s valuation, has since changed his tune, stating that he believes the company has the potential to become a market leader in the food delivery space.The key question for investors is whether Zomato can continue to deliver on its growth promises, or if the current price already accounts for all the good news.
Conclusion
Zomato’s journey from a post-IPO slump to becoming a profitable, high-growth company is nothing short of remarkable. While the stock has undoubtedly come a long way, the question of whether it is overvalued remains a point of contention among investors. For those considering investing in Zomato now, it’s crucial to weigh the company’s growth potential against the risks associated with its high valuation. As always, conducting thorough research and aligning any investment with your long-term financial goals is essential.
