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Zomato target price cut further by Ashwath Damodaran; valuation guru says stock ‘still not a buy’

A year after pinning Zomato’s stock price at Rs 41 per share, Damodaran in a new blog post has valued the food-delivery behemoth at just Rs 35.32 apiece.

Zomato target price cut further by Ashwath Damodaran; valuation guru says stock ‘still not a buy’
Aswath Damodaran's valuation of Zomato is contrary to what Jefferies said earlier this week and Kotak Securities did today. (Image: REUTERS)

Zomato stock may still be overvalued despite its sharp fall in share price, according to valuation guru Aswath Damodaran. A year after pinning Zomato’s stock price at Rs 41 per share, Ashwath Damodaran has now valued Zomato stock at just Rs 35.32 apiece. “The value per share has dropped from Rs 40.79 to Rs 35.32 per share, with much of the value change from last year coming from macroeconomic developments, manifested in a higher cost of capital,” Aswath Damodaran, Professor of Finance, Stern School of Business, NYU, wrote in a post. Zomato stock has plummeted 69% so far this year; it closed at Rs 45.65 per share on Thursday, rising 3.87%. However, he said that if the stock falls to his base case of Rs 35 he may buy it as a part of a diversified portfolio.

What’s changed?

Aswath Damodaran said that in the last one year since he valued Zomato at Rs 41 per share, a lot has changed in the market and for the company as well. “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,” he said. Swiggy and Zomato remain the two big players in the food-delivery sector controlling a near-equal share of the market. “As a consequence, Zomato’s gross order value and revenues have both jumped over the course of the last year,” he added. Zomato’s strong cash and liquidity cushion is also being seen as a positive which has changed upwards.

However, it is not all positive change. Zomato’s gross order value has dropped, according to Aswath Damodaran. “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,” he said. While Zomato’s revenue has grown by nearly 81%, the company’s losses have also widened. The Stern NYU professor has refused to buy the economies of scale argument claiming that the cost of goods sold is rising much faster than revenues and operating and net margins both became more negative over the last year for Zomato.

Changing macros

The risks emerging from inflation and the fleeing of investors from riskier assets are also seen as changing the story. At the time of Zomato’s market debut, capital was flowing freely across the globe and technology companies, especially the young ones were finding favour with investors despite their money-losing habits. Aswath Damodaran had earlier stated that less-risky companies with pricing power and high gross margins would be less exposed than riskier, money-losing companies.

Re-valuing Zomato stock

Not much has changed in Aswath Damodaran’s core valuation story, apart from the acquisition of Blinkit. “Note that my core story for the company has not changed, but its Blinkit acquisition suggests that Zomato is planning a substantial foray into the grocery delivery business (pushing up the total market size currently and in the future), albeit at the expense of a smaller slice of revenues and a smaller market share,” he said. The gross market share is expected to be 30% in 10 years with a revenue share of 15%. This leads Damodaran to pin Zomato’s value per share at Rs 40.79 to RS 35.32 apiece.

Going contrarian

The analysis done by Aswath Damodaran is quite opposite to what global brokerage firm Jefferies said earlier this week. The brokerage firm believes Zomato’s path to profitability is clearer now and sees a more than 100% rally. Jefferies reiterated its stance on the stock when Zomato share price fell 13% this week after the lock-in period for pre-IPO investors ended. It is also contrary to what Kotak Securities said in its daily note. The brokerage firm upgraded the stock to buy with a fair value of Rs 79 per share. “Zomato’s food delivery business is well-poised to grow at a strong pace over the next decade led by attractive market opportunity and strong execution capability,” analysts said. “ Sharp stock price correction warrants an upgrade in our rating to BUY from ADD,” they added.

Aswath Damodaran ends his blog post and revaluation of Zomato by adding that he would buy Zomato, as part of a diversified portfolio and not as a stand-alone investment if the stock drops to around Rs 35 per share.

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