Zomato share price rally has stalled: more upside?

Zomato share price has been firing on all cylinders, making it one of the best-performing food delivery companies. It has jumped by over 550% from its lowest point in 2023. In the past 12 months, it has risen by over 180% while Uber and DoorDash have jumped by less than 80%. Just Eat Takeaway stock has barely moved in this period.

Zomato stock retreated slightly on Tuesday after Antfin, a Singapore company, sold shares worth over $556 million in the company.

Strong growth and market share

The food delivery industry has grown rapidly in the past few years, a trend that accelerated during the Covid-19 pandemic. Some of the top companies in the sector have attracted multi-billion valuations, with DoorDash being valued at over $51 billion.

Demand for takeaway food and online deliveries will likely continue growing in the next few years. I believe that the sector will be dominated by a few large companies that will continue growing their market share. 

Zomato has become a dominant player in the Indian food delivery market, which has helped to push its market cap to over $27.2 billion. It has done that by focusing on market share growth, a factor that pushed Uber Eats out of the country. 

The company has also expanded its business in other areas like groceries, through its Hyperpure brand, and instant commerce. On the latter, Zomato owns Blinkit, a company that lets people buy from local stores and get products within minutes.

From a macro level, Zomato is in a unique place where it is dominating an industry in an economy that is growing at a rapid pace. India has over 1.4 billion people and is growing at over 7% annually, creating many middle class along the way. This means that it has a large total addressable market.

Zomato’s business is growing

The most recent catalyst for the Zomato share price surge was its financial results, which showed that its revenue growth continued in the last financial year. 

These numbers revealed that Zomato’s gross order value (GOV) jumped by 53% in the last quarter to INR 15,455 crore or 154.5 billion crore or $1.86 billion. 

This growth translated to its revenues and earnings before other items (EBITDA). Its revenue rose by 62% to INR 45.2 billion ($544 million) while its EBITDA soared by over 2.99 billion rupees and $36 million.

These numbers mean that the company is growing rapidly. For example, in the United States, DoorDash’s gross order volume rose by 26% in the second quarter while Uber’s gross bookings jumped by 19%.

Most importantly, the management believes that the business is still in its early days and that it may continue growing in the coming months. In the last financial statement, the management anticipates that the food delivery GOV growth of 25% could continue in the near term. 

Additionally, Zomato is also continuing to grow its margins. While the contribution margin slipped from 7.5% to 7.2% and the EBITDA margin came in at 3.4%, the management sees it rising to between 4% and 5% by Q1’25.

Growth continues but risks remain

Zomato believes that it has more room to grow in the next few years. However, it faces numerous challenges going forward. The first one is that some of its key areas are facing substantial competition that could hurt its margins. For example, Blinkit is seeng aggressive competition from the likes of Swiggy Instamart, BigBasket, Zepto, and Amazon Fresh. 

Second, its growth metrics seem quite ambitious. For example, the management wants to get to 1,000 stores by March next year and 2,000 by the end of that year. While this is achievable, it could affect its growth.

From an investor’s standpoint, the company seems quite overvalued, which could affect its future returns. 

Zomato has a market cap of over $27 billion and annual revenues of $1.6 billion in 2023. To a large extent, this valuation can be justified by its revenue growth considering that the company made over $0.49 billion in 2021 and is already growing by over 25%. 

The challenge, however, is that the delivery business tends to be a low-margin one. In 2023, its annual profit was just $42 million or 351 crore. While its turn to profitability is welcome, it will take longer to justify this valuation.

Zomato share price analysis

The daily chart shows that the Zomato stock price peaked at INR 279, where it has formed a double-top chart pattern. In most cases, this is one of the most bearish signs in the market.

The two lines of the MACD and the Percentage Price Oscillator (PPO) indicators have formed a bearish crossover. Also, the Relative Strength Index (RSI) has moved from the overbought point of 79.30 to 63 and is pointing downwards.

Therefore, in the short term, the stock could continue retreating. However, in the long term, the stock will likely continue rising as the momentum continues. If this happens, the Zomato share price will rise to INR 300.