Zomato IPO – Why I am Avoiding It

The Most awaited IPO of Zomato will finally be here next week. It is one of the first possible Internet Startup which comes up with a public offering.

The dichotomy is, being an Online Entrepreneur, I am avoiding it. I will share why I am not considering investing in Zomato either in the IPO or on a listing day.

So without much ado, let me share why I am avoiding the Zomato IPO.

Too Hot to Handle

For me, the hype around the IPO is way too much. However, the company is also making sure to take advantage of the heat of the moment.

The decided IPO pricing was between ₹70-72, but now it is between ₹72-76. The final timeline for the IPO was 19th July, but it has been preponed to 14th July. So it is getting an IPO a few days early to garner a ₹ four extra per share.

Further, Info edge was supposed to sell ₹750 crores is only selling ₹375 Crores. So definitely, they will sell after listing (not immediately for sure).

I have memories of Reliance Power, where it was all hype. I am not saying this IPO may be the same as Reliance power, but I prefer to stay out of it when there is too much hype.

Very Different from Google / Facebook

Zomato is an Internet startup, but it is very different from FAANG (Facebook, Apple, Amazon, Netflix, Google). They all were profitable when they went public.

Zomato is a loss-making company.

My Recipe site and its YouTube channel is an Internet startup. So I can do online advertising to generate more views and traffic on my web properties.

Similarly, any online startup can do the same, and Zomato is no different.

The critical aspect for me to invest at such high valuations is when the company breaks even.

I will prefer investing when an online startup stops burning the investors’ cash to generate the business.

Zomato processed 30 million orders in 2018 and 400 million orders in 2020. As a result, revenues doubled from ~1,400 to ~2,700 crores in a year before an IPO.

The stats look fantastic, but the amount of cash burnt to generate the numbers is critical to consider an investment opportunity.

I am not equipped to Value Zomato.

The metric investors are considering is average order value (AOV).

The average order value is the average value of all the orders placed on the app. For example, suppose there are five orders placed with a value as ₹300, ₹350, ₹400, ₹450 and ₹500. The average order value, in this case, is ₹400.

Zomato will make money from the customer as the average order value increases because they make a 20% commission. So more significant order means more commission.

What I like to value Zomato are repeat customers orders. With 15 Lacs pro customers, I am sure it is bound to get repeat orders. However, with 3 Crore plus active users monthly, only 15 lacs have chosen to be a pro member. Not very convincing to me.

Fierce Competition by Swiggy and Amazon

As a customer, I don’t see to remain with Zomato when I have a better offer from Swiggy or Amazon. It is not a unique business that I prefer when investing.

So, I see Zomato as similar to the airline industry, where it is very little for a customer to keep using their service.

Google and Apple are different because they built products that have no competition.

Netflix is way above all the entertainment apps and spends money on the content far more than anything else.

As a customer, you feel Flipkart isn’t a competition to Amazon.

However, if Zomato and Swiggy don’t have a logo on their app, there is no way to differentiate them.

Even Facebook is feeling the competition from other social media sites, especially YouTube. However, they managed to acquire WhatsApp and Instagram that is helping them to stay ahead.

Final Thoughts

I have shared my viewpoint as to why I am avoiding the Zomato IPO.

Please don’t consider it a way to discourage you from investing in the IPO. However, it is a way to remind you to do your due diligence before considering it either as an investment or for the listing gains.

I like to stay away from it and see how things play out. Of course, I want to be wrong in avoiding it, but I prefer it that way.