Allowing for the wide ranges of estimates that one can have on the total market for food (restaurant and grocery) delivery in India in 2032 and the uncertainties about Zomato’s share of that market and its operating margins, one gets a range of values.
“The median value of Rs 34.12 is close to the base case value of Rs 35.32, not surprising since the input distributions were centered on my base case input values, and at its current stock price, the stock is still at the 70th percentile. That said, a few more weeks like the last two will push the price below my median value, and if it does, I would buy Zomato, as part of a diversified portfolio,” Damodaran said.
Damodaran said he received pushback from those who disagreed with his valuation, with half arguing that he was being way too optimistic about the future and the other half that said I was ignoring the potential for growth overseas and in new businesses.
Now, after a year of his Zomato valuation blogpost, Damodaran said while some suggested that price dropping to his value is vindication of valuation, Damodaran said he is not part of that group for three reasons.
First, it seems skewed to celebrate only your successes and not your failures, and it behooves him to let everyone know he also valued
at close to Rs 2,000 per share, and the stock is currently trading at Rs 713.
“Second, even if nothing in my valuation has changed, the value per share of Rs 41 per share was as of July 2021, and if it is a fair assessment, the expected intrinsic value per share in July 2022 should be roughly 11.5 per cent higher (i.e., grow at the cost of equity), yielding about Rs 46 in July 2022,” he said.
Finally, Damodaran said, the company and the market have changed in the year since he last valued it, and to make a fair judgment, the company will have to be reevaluated.
Damodaran said since his review of IPO valuation, there have been four quarterly reports from the company, in addition to news stories about governance and the company’s legal challenges, and there is a mix of good and bad news in them.
On the good news front, the food delivery market in India has continued to grow over the last year, and Zomato has been able to maintain its market share. In fact, there are signs that the market is consolidating with Zomato and Swiggy controlling 90 per cent of the market share of restaurant deliveries. As a consequence, Zomato’s gross order value and revenues have both jumped over the course of the last year, he said.
In addition, the substantial cash that Zomato raised on its IPO is providing it with a cash and liquidity cushion, with cash and short term investments jumping from Rs 15,000 in March 2021 to Rs 68,746 (including short term investments) in March 2022.
“Since Zomato is a young, money-losing company, and the likelihood of failure acts as a drag on value, this will benefit the company, since it provides not only a cushion for the firm but also eliminates dependence on external capital for the next few years,” Damodaran said.
On the bad news front, Damodaran said, the take rate, i.e., the slice of gross order value (GOV) that Zomato keeps has dropped substantially over the last year, reflecting increased competition in the market, higher delivery costs and Zomato’s entry into newer markets (like grocery delivery) with lower revenue sharing.
“In addition, the growth has come in fits and starts, and given Zomato’s active acquisition strategy, it is not clear how much of the revenue growth is organic and how much is acquired. Not surprisingly, the company’s losses have ballooned over the last year,” the value investor said.
Damodaran said some investors did buy Zomato shares in their glory days in 2021 and are either continuing to hold, hoping for a comeback, or have sold, and are licking their wounds.
“I am sorry for your loss, but please don’t attribute to conspiracies (where insiders, founders and backers play the role of villains) that can be better explained by greed, and its capacity to cloud judgment. No matter how tempted you are to blame the financial news, journalists, equity research analysts and others for your decision to buy Zomato at its heights, that decision was ultimately yours and the first step in becoming a good investor is taking ownership of your decisions,” he said.
Put bluntly, Damodaran said, if you live by momentum, you die by it.
“Your consolation prize is that you have lots of companies in this market (from Cathie Wood at Ark to the thousands of investors who put their money in Bitcoin, NFTs and other cryptos), and this too shall pass,” he said.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)