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After reading this article, you might probably wonder, the title should be sort of: Zomato - The After IPO Analysis of The Loss-Making Unicorn. But I put a few opinions of mine and the investment approach I follow, and also I do not want an analysis blog as I am not a financial advisor, I decided to categorized the article as Opinion and titled "The Investment Approach I Follow."
To begin with, Zomato, a food delivery startup, founded in 2008 becomes the second company with the highest market capitalization on a listing day, following Coal India. Although the food delivery company is yet to generate a penny of profit, it has entered the club of the top 50 listed companies in India in terms of market capitalization with a market capitalization of more than ₹1-trillion. It is now valued more than one of the biggest well-known companies in India - Tata Motors, Mahindra & Mahindra, Britannia.
However, talking about what everyone is not talking about, Zomato is now the most expensive food delivery company globally in terms of market capitalization-to-sales ratio. In the startup space, it is normally excepted benchmark that a company does not make a profit in its initial years. But listing comes with great responsibility. During the initial public offering, for a short duration, valuations of tech companies are often noticed higher and misleading. For example, Zoom, Google, Twitter, and Facebook, during their IPO horizon, traded 2000, 200, 90, and 30 times higher than their sales, respectively.
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A note from ICICI Securities says - Profitability and cash flow are great understanding matrics, they are better applied to businesses in a steady state such as Infosys, Google, HUL.
It can be possible that the stock prices rise significantly despite the poor performance and weak fundamentals. It is because the stock price is controlled by us - retail investors. The stock price depends on the demand and supply for the stock. Note that majority of people do not study the company they are buying and just trade based on so-called technical analysis and news, which is baseless and misleading analysis. Yes, there is a majority. And those people control the market by manipulating and controlling the stock market. Let us understand how:
They formed technical analysis. They taught this algorithm to everyone. Let's say they decided that if the stock price went up for 3 days straight and if its volume is increased during that period, you should buy the stock within a particular time. Everyone who learned that will try to buy the stock, increasing the demand significantly. And as we know it depends on the demand and supply for the stock, the sudden increase of buying raises the stock price. They created many mathematical and statistical patterns and indicators, that analyze the past data in order to predict the future price of the stock. It's important to learn for the future, considering the past. Every time, it is different. But they make a mistake by not considering it and giving more value to the past, considering there is no difference.
In technical analysis, a company and its business ecosystem do not matter, all it matters is a stock. Hammer pattern, hanging man pattern, short-bodied candle, long-bodied candle, no-body candle, reversal patterns, and many more are examples of this. I do not hate technical patterns and indicators totally, they 'show a perspective to be noticed in the real-time market' and work for the short-term, in some cases, but for me, it is a baseless analysis and it does not reflect a true picture of a business. It disconnects a business from its stock. In my opinion, one can still be a rich investor by not seeing a stock price a single time. Few certain indicators and ratios are good enough, but most of them do not mirror a company's any kind of business operations.
To know about a company, a detailed analysis of the business is the only option available. You know the case of Harshad Mehta, who manipulated the stock of a company to a certain extent that its price went up to ₹9000 from ₹200! That is exactly what the group of traders is doing in the new age. Manipulating every now and then. As I said honestly, it is not that I hate technical analysis, it is a great tool to analyze in order to enter if you want, but the investors are not using it properly. As I always say, investing should not be reward management, rather it should be risk management.
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— Rahil Brahmbhatt (@rahil_51) July 4, 2021
A very common piece of advice that every successful investor gives but very few seekers implement: What scares people is market volatility. In short term, the market will look difficult to navigate, but in the long term what eventually gets rewarded is how well the business has done. Everyone seeks tips and insider information. The three phrases that you must engrave in your mind are good businesses, right valuations, and long-term focus.
There is no doubt that success in the stock market is achieved only through assumptions and hopes. There is a process. There should be planning and a strong base. You get rich by not buying a coffee on Monday, not buying cigarettes on Tuesday, not buying for on Wednesday, not initiating a plan for a movie on Thursday, getting a book on Friday, learning on Saturday, and planning investments on Sunday.
On 15th March 2020, people, as well as analysts, were preparing for the next fiscal year. On 23rd March 2020, stock markets saw their biggest fall in one day. Today, after 16 months, indices gained more than a double from march low. There's no perfect analysis in the stock market, but there is a process to follow.
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But nowadays, it is not just Zomato, companies that suffered huge losses during the Covid19 pandemic are witnessing record highs in their stock prices, take aviation, for example. In fact, despite the longest economic slowdown in India, a short recession in 2020, and a devastating second wave of Covid-19, the stock market looked happy, assuming a potential future growth. I remember a tweet from David Haynal, in which he said, "investors are trying to judge how the normalization of economies will impact the equity market." All I want to say regarding the process is, it is important that the basis of that assumptions and hopes are strong.
Let us know, how.
Zomato is a tech giant. It is the market leader in the food delivery segment, without generating a rupee of profit. But its investors earned a lot despite its expensive valuation and when the time came, they exited, launching an IPO. However, there is a huge chunk of investments by old investors remains in the company, seeing the opportunity and huge potential of internet penetration in the Indian market, which can only be achieved in a really long-term.
I remember one of my mentors saying, "if we really concentrate and have a stock-specific approach, there is nothing like this business (was talking about a different company though) - equity investing."
During the pandemic-related restrictions, people got used to door-step deliveries - especially food and grocery deliveries. Now, as the IPO is launched and the company is listed, the risk of total failure should be very low. Companies probably know that handing public investors in the secondary market has a different pressure than handling investors in the primary market. They get pressure to generate profits because the secondary market does not have the 'normally excepted benchmark' of zero profit.
In conclusion, you can analyze any stat you find on the internet. Peter Lynch once said, "Investors focus on one bit of data that is available everywhere - price. To my mind, the stock price is the least useful information one can track, and it is the most widely tracked." That is what is everyone is doing. But it is nothing against the experience of working in the industry and having a little more knowledge of what's happening than others who just read graphs. This experience can predict upcoming trends. 70% of people I know are trading or intends to trade without understanding it properly. In the future, with the market becoming more broad-based, the volatility will increase with the growth. To balance: Invest in the country's growth, invest for the future, and invest where there is the responsibility. At last, as good business needs financial support for which investors step up, as investors' money deserves a fundamental study of business before going into the business, every fundamental study requires an investment of time for the money to be deserved and for the deserved business.
