Zomato fails to deliver [Finance Fridays]

You can say, their stock performance has been ....rotten (that word play is multi-layered)

Jul 29, 2022

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How’s it going my funky fraternity,

Today I’ll be bringing some news from my home country, India. However, to my international audience, don’t click off just yet. The lessons we will be covering are universal. You will find the ideas discussed very tasty.

The Indian Food Delivery giant Zomato's stock has hit another 52 Week Low. The price is now 70% below its peak. VCs have pulled out their money, leaving Retail Investors (everyday people like you and me) facing massive losses. This comes as a shock to many people because the company IPO’d with a lot of hype behind it.

The strong initial performance was thanks to the hype. The crash is because of terrible fundamentals. Source

This course of events has left many people asking the questions-

How is it possible for a company that IPO'd with so much hype and with so many VCs backing it to crash so spectacularly? And why is it that retail investors were the biggest losers in this crash?

Many people have turned very sour given this new turn of events. However, those in the know are not shocked. If you missed it, we covered why such companies have such a dramatic rise and fall right here. Make sure you’ve read that before proceeding. The ideas discussed today will build on that.

You will see that the crash of Zomato followed the exact blueprint I laid out in that article. Step by step. Notice that I wrote that article 1 week before the crash of Zomato. This proves the timelessness of the ideas I share with you.

Now that I’m done gloating, there are some lessons unique to the Zomato situation that we must learn from. Otherwise next time, we will be the ones skewered. Let’s get into them.

Key Takeaways

Swim with the fishes, you’ll get eaten by sharks- Here is an interesting fact that most people don’t know, food delivery is an extremely unprofitable business. That comes as a shock to people, especially seeing the crazy fees charged online, but everyone in the food delivery business is losing money. This is true of companies all over the world. The YouTuber, Modern MBA, has a very insightful video on why this is the case. Make sure you watch that. You will find the video linked at the end. Zomato entered this notoriously terrible business, with no real innovations and no established plans to make money. And just like every other food delivery app in the world, they lost a lot of money.
Play Stupid Games, Win Stupid Prizes- The Zomato founders decided that losing money in just one way was too boring. So they decided to acquire the delivery service Blinkit. Oooh, vertical integration and diversification. The only problem- Blinkit has an annual cash burn of 165 Million USD. If Zomato was an established business with solid cash flows, this might make sense from a long-term perspective. However, this acquisition does almost nothing for them now, and the additional burden actually hurts them. As of now, this acquisition just generates hype and is probably in part due to impatience+ego (Zomato has tried to enter the groceries business twice. It failed both times).
Don’t fall for the hype- Many people invested in Zomato because of the all big names like SoftBank backing it. They heard all the ‘gurus’ preaching about how Zomato would be a great profit maker. Critics were dismissed using the promise of Cloud Kitchens, and how they would change the industry and finally make it a cash cow. As the stock markets cool down, and VC money has pulled out, the ones left with serious losses are the retail investors who invested because of all the marketing and noise. Don’t let this be you. When considering a business you’re not familiar with, a good rule of thumb is- “If it has no cash flow, just say no.”

Beyond this, master your fundamentals beyond just software development and computer science. Non-tech subjects will help you critically evaluate a lot of the noise and improve your decision-making. Read this article for a guide on the subjects that you must know about to take your decision-making, career, and communication all to the next level. Make sure to give it a read to protect yourself from all the hype. Now watch enjoy the lovely video from Modern MBA.

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