Why Investors Should Avoid Investing in Zomato
Zomato is a food delivery and quick commerce service that acts as a bridge to connect with restaurants and grocery delivery services. Zomato leads the largest share of the Indian food delivery market.
The company recently acquired Blinkit, which is at the top of the quick commerce space and holds an impressive 46% market share. Restaurant commissions, delivery fees, and ad revenue are the sources of income for Zomato.
Although the company has expanded its user base and revenues, there are still issues with financial performance. It has been unstable for reasons such as operational inefficiencies, growing competitors, and a volatile market.
Recent Financial Performance
The third quarter of FY25 is where mixed results are reported for Zomato. On the revenue front, the company reported a surge to ₹54.05 billion, or up 64% year on year, which shows great growth in the number of orders and scale in the platform; however, net profit declined 57% to ₹590 million.
Woes of Zomato are now compounded by widening losses at Blinkit, which has risen to ₹1.03 billion.
Operating more fulfillment centers than before because it has become a leader in quick commerce has resulted in costs shooting up substantially and is eating into the company’s overall profitability.
The contribution margin also declined to 3.8% from 4% in the previous quarter. The operating profit margin declined to 17.7% in FY23 compared to 37.5% in FY22.
The net profit margin too declined from 29.2% in FY22 to 13.7% in FY23, which reflects diminishing profitability.
Factors Causing Share Price Decline
1. Growing Competition
Competition intensity is really high with Swiggy, Zepto, Flipkart, and Tata Group’s BigBasket as these players are constantly investing for acquiring customers,
network of fulfillment centers, and other marketing activities forcing Zomato to continue competitive spending for protection of market.
Blinkit has managed to capture 46% of the market share in quick commerce but failed to turn a profit. The reasons are that operating costs are high.
The pressure on margins comes due to the better pricing by competitors and even faster delivery mechanisms.
2. Regulatory Scrutiny
India’s Competition Commission recently slapped charges of anti-competitive practices on Zomato when favoring a certain restaurant or others.
Regulatory and legal hassles, loss of reputation have troubled the firm in the present scenario. The entire process deters investors, thus lost opportunities in growth potential.
3. Operational costs with declining margins
This growth in the fulfillment centers from Blinkit to Zomato has sharply mounted the cost structure of the companies.
The decline in the contribution margin is also apparent, and thereby, this illustrates that the Zomato doesn’t handle effective cost management through revenue growth and thereby declines are visible in investments.
4. Negative Market Sentiment
Recent quarters of missing profit estimates have done little to assuage the negative feelings. Consistent underperformance coupled with climbing losses in quick commerce raises a strong question as to whether Zomato will be sustainable in its ability to be profit-positive.
Technical Analysis of Stock Performance of Zomato
If one checks the stock performance of Zomato, an ongoing downtrend appears to have marked the last thirty days.
1. Relative Strength Index (RSI): RSI has fallen below 30 and now places the stock in an over-sold zone. Expecting weak investor sentiment.
2. Moving Average Convergence Divergence (MACD): MACD shows a bearish crossover. That is, it indicates declining momentum for the stock.
3. Trading Volumes: The trading volumes when the stock price is falling are high, and that likely comes off as selling pressure.
| Date | Closing Price (₹) | Volume (Millions) | RSI | MACD |
|---|---|---|---|---|
| January 1, 2025 | 100.50 | 12.4 | 35 | Negative |
| January 15, 2025 | 85.20 | 15.8 | 28 | Negative |
| January 22, 2025 | 77.80 | 18.2 | 25 | Negative |
These technical indicators indicate that there is a strong bearish trend, so the share price of Zomato would be going down.
Headwinds in Quick Commerce Business
The quick commerce segment is very capital-intensive and low-margin. Blinkit is incurring more and more losses, and it’s really tough to scale up the business in this segment.
Other players such as Zepto and BigBasket are also fighting for market share, and it becomes all the more challenging to be profitable.
This business model is very capital-intensive for inventory, warehousing, and logistics. This strategy of rapid growth in this business segment has been straining the financial health of Zomato, which has in turn negatively impacted investor sentiment.
Impact of Antitrust Findings
The implications of the CCI’s findings are huge for Zomato. Favoring certain restaurants is against the principles of fair competition, which may attract penalties and legal cases. Regulatory challenges could also make Zomato change its business practices, which may affect its revenue model and operational efficiency.
Investor Outlook and Recommendations
It needs a watchful eye for the investors while the challenges mounted around the company in such offers from Zomato. The declining profitability,
regulatory pressure, competitive threat, and bearish technical triggers have been raising the difficult journey warning flag.
The focus on quick commerce, keeping with the trend in the market, has yet to translate into profitability. It has added loss-making Blinkit with a costlier expansion to the balance sheet.
Apart from this, challenges in operations may rise as well with the regulation posed by this investigation from the CCI.
From technical aspects, Zomato’s short-term price decline still holds room for potential negative movement.
Challenges that Zomato faces today indicate a large risk for the investors. Despite the fact that the company is growing in revenue and market presence, the fact that profitability has declined, quick commerce losses are increasing, and regulatory issues loom large as red flags.
Sharp drops in Zomato’s share prices have also reflected negative technical signals that can make the trend go further as a downtrend.
Therefore, investors are also well advised to keep a close watch on the trend and lookout for alternative stocks in which their money could be invested near-term.
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