What is ailing Zomato and other new tech stocks

“One needs to monitor these companies closely as to what kind of business pivots they are doing and what kind of companies they transform into. At the end of the day, people would want profits because that is why they are paying very high multiples,” says Aditya Kondawar, Chief Operating Officer, JST Investments.

What is happening with Zomato? Some are saying that this is an opportunity to buy the stock but what according to you is spooking investors?

Zomato had a very eventful day on Tuesday because it almost touched its IPO price at Rs 76 and then closed with some gains. What has really spooked Dalal Street with Zomato is the fact that some of their key metrics have been stagnating. So number one, their gross order value has stagnated as well as the number of active users on the platform have stagnated.

A lot of expectations on growth has been priced into these new-age stocks and the way the stock unravelled is a clear indicator of how people do not take lightly to misses on the growth expectations.

Number two, I believe that the kind of acquisitions that Zomato has done recently may not necessarily fit into the whole delivery ecosystem. Zomato disclosed that they are going to acquire cult.fit as well. A gym chain does not really fit into the whole scheme of delivery. Not just that, some of the recent acquisitions such as AdOnMo and UrbanPiper were done at very heavy valuations. They paid almost 187 times price to sales on AdOnMo and for UrbanPiper, they paid almost 125 times price to sales. So I feel the Street is spooked as to what is the strategy of the business going ahead and what kind of startups are they going to invest in?

While Deepinder Goyal did speak about enhancing the core delivery ecosystem by investing in the allied companies, acquisitions such as cult.fit really do not fit into the whole scheme of things.

When all of these listings were coming into play, the sheen on them was with the great valuations they were commanding in the private equity space and how large they had become in terms of brand names and the market seemed ready to overlook the fact that not many of them were making profits. What has changed in these last few months? We have quarterly numbers for some of these companies including PayTM, Nykaa and some of the others.

Like I said, numbers have been out for a lot of these companies and one trend that really ties a lot of these new-age companies together is the trend of advertisement and promotion cost. Keeping the private valuations aside, all of these new-age companies have gotten reality checks in the markets because sooner or later these companies have to make profits because investors are paying a higher valuation for them as they want to get into a future tech company which will one day make profit. That is the reason why companies like Zomato, PayTM or Nykaa got their IPOs at 30-40-50 times price to sales.

What I really observed during IPO filings was that almost all of these firms pulled back on their A&P expenses which really narrowed down the losses and then after the IPOs, the firms have gone over and above their A&P cost and this somehow is giving a feeling to the Street that to clock in those higher growth rates, these companies have to keep spending and discounting heavily. Maybe that has spooked all of the investors in these companies and, of course, the broader market correction is, of course, there.

Are these companies long-term bets at any point or would you wait to see some clearer business model before taking that call?

Personally I would really like to monitor these businesses. They have definitely built exceptional businesses. The underlying business model may not be the perfect one. They may really change it because we all know that startups keep pivoting continuously. Amazon started off as a book seller and today they are a software company with AWS accounting for majority of the revenue and profits.

Now coming back to your question, one needs to really monitor these companies closely as to what are the kind of business pivots they are doing and what kind of companies do they really transform into. While the underlying metrics such as average transacting users or their customer base that they have or the gross order value, gross merchandise value seem good, at the end of it, people would want profits because that is why they are paying very high multiples.

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