Zomato shares plunge by 18% today! What’s weighing on the shares

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Zomato share price

For the first time since its listing, Zomato shares have fallen below their listing price. We take a look at the reasons behind the fall.

Zomato stock update

Zomato made an exceptional debut on exchanges in July 2021. The Zomato share was issued at Rs 76 per share, and it opened with a 65% premium at Rs 126. It touched a lifetime high of Rs 169 on 15 November. However, post-November, the stock has taken a downward trajectory. Since Jan 2022, the stock has fallen close to 33%.

Updates from Q2FY22

  • The company reported an adjusted EBITDA loss of Rs 310 crore as compared with Rs 170 crore in the previous quarter.
  • Adjusted revenue grew 22.6% quarter-on-quarter at Rs 1,420 crore.

Below are some reasons for the falling share price

The overall market fall - Zomato stock has fallen 18.6% today. One of the prime reasons for it is overall negative sentiment in the market. Nifty50 has fallen 3.5% in the same period. 

Pressure on tech stocks - The recent report on Fed rolling back liquidity because of high inflation in the US has weakened the case for investment in overpriced technology stocks that have no near-term profitability visibility. The shares of other non-profitable tech companies like PaytmCarTradeFino Payments Bank have fallen between 10% and 50% from their respective listing price in the last couple of months.

New GST rule - The new GST rules that came into effect from 1 January have made food delivery apps liable to pay 5% tax on restaurant services provided by them. It will impact the company in one way or the other.

Brokerage Report - JP Morgan, in its recent report compared Zomato and Swiggy, and its findings showed Zomato lagging behind Swiggy. The report suggested:

  • Zomato has a thinner Metro restaurant network and density compared to Swiggy. 
  • There is higher restaurant exclusivity than expected with Swiggy leading at 56% and Zomato at 45%, supporting higher take-rates.
  • Zomato has higher discounts, suggesting higher aggression adversely impacting contribution margins.
  • Swiggy casts a wider net with a longer service radius expanding customer selection that can help it build/retain leadership.

Overall, the brokerage firm has marked Zomato as 'underweight' citing disappointment in profitability, unit economics, and expensive valuations.

Zomato Target price

Zomato has a median price target of Rs 166 in 12 months by 17 analysts. The most bullish forecast for the stock price is Rs 220, while the most bearish share price target is Rs 90.