Zomato's IPO: Sage Advice for Green-Behind-the-Ears Investors

You can make two mistakes in the stock market: buy a good company at high price, or a bad company at a low price.

Zomato’s IPO price is in tricky territory for new investors. 

Image: Aroop Mishra/ The Quint

Did you place at least one amongst the 40 crore online orders that Zomato delivered last year? It’s a pretty safe bet that you did, given how we’ve lived in digital caves for nearly 16 months.

And now are you scratching your head to figure out if you should invest in Zomato’s IPO? Because you’re attracted by all the sexy labels in social media – India’s first unicorn food-tech company; first listed consumer internet platform; its market value, at Rs 75,000 crore, being greater than the sum of the iconic Taj Hotels, Oberoi Hotels, Leela Hotels, and 17 other hospitality giants?

Zomato Makes You Salivate in Anticipation

You’re very tempted, right? After all, there’s already a premium of over Rs 10/share in the grey market. The company is exuding confidence, having increased its offer size by Rs 1500 crore and its value by Rs 15,000 crore in just three months since filing its prospectus with SEBI.

You’re hearing increasing chatter about large foreign investors planning to write “big checks” in the IPO. You’re excited, you can hear your accelerating heartbeat, your palms are sweaty – should I? How much? Will I even get 100 shares if I put all my savings in the application?

The Addictive Rush of Risk, Fear, and Greed

But you’re also mighty confused. Because you’re an innocent twenty-something who just plunged headlong into the equity game during the pandemic. There was nothing else to do but fiddle on the computer screen all day long. And when your friends began dabbling in shares, bragging about how much money they had made as the Nifty Fifty Index doubled from 8000 to nearly 16000, you could not hold back.

Even though your old man always warned you to stay away from three things - smoking, drinking, and gambling in stocks – “this satta-baazi has destroyed so many lives, never do it, just put your money in a bank FD”, he would say. But clearly, he was out of synch with this addictive rush of risk, fear, and greed.

Then your little sister – the brainy, curious one who always seemed to know about unusual things happening in our world - crashed through your reverie with a stunning question: “Bhaiyya, tell me, why is everybody going mad over Zomato’s IPO? Don’t they know that the company is making huge losses? See here. Last year it sold food worth Rs 2,605 crore, but lost Rs 2,386 crore. I am scared that you will repeat the Bitcoin mistake. You bought at $ 60,000, but in a few weeks its value had fallen to $ 30,000. Please be careful.”

Always Buy a Good Stock at the Right Price

So, you dig in a bit more to figure out the intrinsic value of the company. All such food-tech operations across America, China, and Europe are making losses. Good, so there’s nothing peculiar about Zomato. All of them are also extremely pricey, quoting between two to seven times their annual revenue. Zomato is a tad pricier, at nearly eight times, so that’s a negative blip.

But more worryingly, four out of six overseas stocks have given steeply negative returns this year. Only DoorDash of America is showing a healthy appreciation. In that sense, Zomato’s IPO price is in tricky territory.

Finally, you turn to a sage veteran for advice. “Sir, what should I do? Use the bulk of my savings to bid for Zomato’s IPO?”

Zomato is Appetising, But is it Good for Your Health?

Sage Investor: “Son, you can make two mistakes in the stock market. You can buy a good company at the wrong/high price. Or you can buy a bad company at a ‘good’/low price. You will lose money in both these transactions, because it’s critical to buy a good company at the right price. Plus, you need to rationally assess your ability to hold equity for the long term, riding the highs and lows of a business cycle until you make optimal returns.

Now, there’s no question that Zomato is a consumer internet platform with a terrific growth curve ahead of it. But it’s also extremely expensive. It may take several years, perhaps even a decade, for deep value to emerge in the stock. And like Bitcoins, it could suffer through massive price swings during business cycles and adverse events. Do you have the financial strength to ride through such volatility?”

You: “No sir, I know how scared I got when my Bitcoin investment dropped by half in a matter of days. I am a middle-class boy. I can’t handle such violent swings.”

Opt for Zomato ONLY if You Have an Appetite for Risk

Sage Investor: “In that case, m’boy, leave these volatile investments for institutional investors who have got the ability to hold on for decades, who understand the swift changes taking place in the digital world, who have the equity cushion to top up when prices crash, and cream profits when prices near irrational peaks. You won’t have the knowledge or the ability or the wherewithal.

My advice would be for you to stick to more regular fare and leave this game to the big boys. For now, enjoy the fancy edamame you order from Zomato.”