- July 30, 2022
- Posted by: Ramkumar
- Category: Posts
Zomato Valuations Review
As #indianstockmarkets soar, we see an influx of IPOs from new-age platforms companies as investors/VCs look to cash out their investments. Zomato was the first such company, and it had managed to do well post IPO, though, in my view, the stock is highly overvalued. So as secondary investors look to invest their money in these firms, they need to ask two questions before investing their hard-earned money.
1)What is the market’s overall size for the products/services that the companies offer?
2)What is the expected market share for these companies?
Let us take Zomato as an example to answer the above questions. India’s food delivery market will exceed $21.4 billion by 2026, and the current market cap of Zomato is $15.27 billion. Therefore, as valuations are forward-looking, investors assume Zomato’s market share would be ~72% of the food delivery market in 2026. However, other players like Swiggy and Amazon are significant competitors to Zomato. We cannot rule out the emergence of new companies in the food delivery market due to low entry barriers.
The only way for Zomato to achieve these lofty valuations is when investors consider Zomato as a #lastmilelogistics player. TAM for Zomato increases when we do that, but it also competes with online commerce like Amazon, Flipkart, bigbasket.com, and other companies like Dunzo and Tata 1mg. So unless Zomato expands its products/services, it does not deserve such a high # valuation.
In my view, investors should remember two things:
1)The collective market share of the companies cannot exceed the sector market share. So, for instance, when we value Zomato or Swiggy, the collective market share of Zomato and Swiggy exceeds the food delivery market share, which implies over-optimism.
2)The market size may expand, but companies’ valuation may be high due to overestimating growth, the ease of entry/exit of new players into the business, and the effect of competition on profitability.