Zomato Hovers Around Bear Territory: Will Rising Competition Push It Over the Edge

Zomato’s stock has faced a significant drop, trading nearly 18% below its 52-week high of Rs 304.70, which it touched in December 2024. Despite a 125% surge in 2024, the stock has been down over 10% so far in January 2025, leaving investors concerned about its performance. In the last one month, the stock has crashed nearly 17%, as of January 9.

On Thursday, the stock fell nearly 1.5% to hit day’s low of Rs 246 compared to Wednesday’s close of Rs 250.05.

According to analysts Zomato’s recent struggles are largely attributed to increasing competition in the Quick Commerce (QC) segment. Companies like Zepto, Flipkart and Amazon are ramping up their efforts, forcing Zomato to offer larger discounts to retain market share. This, in turn, is impacting profitability, leading to concerns about further margin erosion. In the QComm sector, Zomato-owned Blinkit commands a 46% market share, followed by Zepto at 29% and Swiggy Instamart at 25% in Q1FY25, according to a report by brokerage firm Motilal Oswal.

Battle for Dominance in Quick Commerce

Aamar Deo Singh, head advisory at Angel One says that Zomato witnessed correction on the back of growing concerns that margins of the company might further get hit due to rising competition. The company might have to give higher discounts to counter competition, leading to an impact on profitability.

Ecommerce giants like Amazon and Flipkart are also entering the buzzing quick commerce segment to have a share of the pie, while existing players continue to strengthen their play.

Amazon has started testing its quick commerce platform, Tez, in India with employees in some Bengaluru neighborhoods. The local arm of the US ecommerce giant is also starting to onboard dark stores across the busiest areas in the city, according to a report by Economic Times.

Shobit Singhal, research analyst at Anand Rathi Institutional Equities says the Zomato's profitability in the QC segment is expected to be impacted in the next two quarters due to Zepto’s aggressive cash burn strategy, which could lead to Blinkit losing market share as Zepto competes fiercely for customers.

Rival Flipkart’s quick commerce service, Minutes, is planning to hit around 150 dark stores in the ongoing quarter. It is expanding aggressively by adding electronic devices and other high-values categories to the products it delivers in 10-15 minutes. It has started rolling out medicine deliver along with other 150 items in select areas in Bengaluru.

Amid the intensifying competition, Zomato has re-entered the quick-delivery segment with a 15-minute food delivery service, two years after discontinuing its earlier 10-minute feature. The service is available in select locations across Mumbai and Bengaluru, marking a new phase for Zomato in the ultra-fast delivery market.

Jefferies Downgrade

Foreign brokerage Jefferies also downgraded Zomato’s stock from “buy” to “hold,” citing intensifying competition. They lowered their target price by 18%, from Rs 335 to Rs 275. The firm also revised its earnings projections for Blinkit, Zomato’s QC arm, with significant cuts in EBITDA and target valuation multiples.

Jefferies predicts 2025 will be a year of consolidation for Zomato, following its impressive rally in 2024.

However, some analysts expect Zomato's Q3FY25 earnings to be better than Q2FY25, but with adjusted profit growth potentially slowing due to competition and margin contraction.

Despite the challenges, Zomato’s financial performance for Q2FY25 showed solid growth. The company reported a 69% year-on-year revenue increase to Rs 4,799 crore and a fivefold increase in profit after tax (PAT) to Rs 176 crore. However, the stock has wiped out over 15% of investor wealth in the last month, raising concerns about its future trajectory.

Zomato’s Path Ahead

Analysts suggest that the stock is currently exhibiting a negative trend, with major support near Rs 242 and the 200-day moving average at Rs 235.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, points out that the stock may continue to decline unless market sentiment improves.

“The 200-day simple moving average is positioned near Rs 235, which aligns with the broader selling pressure observed in the stock. Given this trend, the stock is likely to move towards these levels unless there is a reversal in the market sentiment or buying activity picks up. Investors should watch for sustained trading near the 200 SMA, as it could as a critical level for potential recovery or further decline,” Mehta said.

Despite the current challenges, Zomato’s long-term growth story remains intact. Its aggressive expansion into Tier II and Tier III cities could fuel future growth, and there’s potential for the stock to recover in the long run. In the short term, analysts advise caution, with a focus on key support levels and potential shifts in market sentiment.

Analysts suggest that investors looking for a long-term perspective, 3-5 years, could see potential in accumulating the stock during corrections, as Zomato continues to strengthen its foothold in the Indian market.