'Night is darkest just before the dawn': Jefferies bullish on Zomato shares amid crash

Worries of Fed tightening are weighing on the profitless Internet names globally. The entire sector has been going through a period of readjustment as the focus is shifting from growth to cash flow. FANGMAN is down 15-65% YTD. This has also been impacting the global food delivery stocks which are down 50-65% YTD, with Zomato being the worst performing stock.

‘Night is darkest just before the dawn,’ said Jefferies in its note on Zomato with High Conviction Buy on the stock with a target price of 100 apiece. 

“From an exuberance at the time of listing last year, Zomato is now unloved, having underperformed peers ytd. Blinkit acquisition elongates path to profitability and despite management guidance on a break-even in food delivery, investors are not giving much benefit of doubt. We think this makes for a great case for LT investors to Buy Zomato shares,” the note stated.

Following the sharp correction in Zomato share price, the stock now trades at 0.9x 1Y forward EV/GMV and 3.5x EV/Revenue. While this is at a premium to global & regional peers, this is justified in the context of long growth run-way along with higher explicit medium-term forecasts on GMV (30% for Zomato vs. 10-20% for peers), highlighted Jefferies. 

“We also see a consistent improvement in profitability in food delivery despite strong 30% Compound annual growth rate (Cagr) over FY22-25E (well ahead of global/regional peers),” it added.

The shine of new age tech stocks is fading away at a very fast pace. In the ongoing market correction due to geopolitical crisis and interest rate hikes due to inflation, share prices of all new age fintech startups have tanked significantly.

Zomato shares made stellar debut on July 23, 2021 on the stock exchanges, but the stock has lost more than 70% of their value since then on concerns about valuations and as global growth stocks cratered. Investors are also not comfortable with the acquisition of Blinkit (formerly known as Grofers), which Zomato recently acquired for 4,447 crore which acted as a catalyst in the food delivery platform’s downward movement as Blinkit is a loss making start-up.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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