Contrary to my opinion, Zomato's IPO was a huge success. The company listed with a ~53% gain. During the day, the stock rose by ~83% over the issue price and closed the day with ~66% gains.
The listing was phenomenal, to say the least. Last week most people were asking me the same question - Did I subscribe? My answer was no. I was expecting a 20% to 30% gain but my higher probability scenario was a negative day 1 return. My thinking was totally off and many people who got the shares ended up with nice gains on day 1.
I was reading the news today and came across an article that said Zomato's super listing is India's FAANG moment. Here is the link to the article - Link. The article talks about how Zomata has paved the way for many startups to list on exchanges. That is true. The article goes on to talk about how India now has the first letter of its own acronym like FAANG i.e. Z. I think this is a retarded comparison and the author has no understanding of how FAANG stocks derive value. There is, however, a paragraph that sticks out the most -
With nearly 30 million average active monthly users, it’s not what the food delivery company has achieved so far that has got the market excited, as evident in its IPO's over-subscription numbers. Rather, it is what Zomato can achieve going forward, leveraging stickiness with its customers, offering them convenience in multiple ways, from grocery and logistics to the drone-based delivery of curated and inspired products, which is whetting the appetite of investors.
The above is the rationale for why Zomato is a great investment and can deliver great returns. Let me explain why I think the rationale is retarded.
First, Zomato has no stickiness. Zomato is a loss-making company that still relies on discounts to ensure customers stay active on its platform. They have no edge in terms of popular restaurants solely listing on its website. Customers aren't loyal to Zomato. They only log in because they want the convenience of food being delivered to their doorstep. It is not as if the company has insight into the financial wherewithal of the customers. They don't generate revenue from Ads. There is stiff competition and there isn't a single thing that really makes Zomato different from its competitors. Swiggy, another company such as Zomato, is just the same. Amazon will enter this space very soon in India. Try beating Amazon, once it gets into this space. To turn profitable, Zomato has to let go of discounts. And once the discounts go, the rug gets pulled from underneath the notion of customer loyalty and stickiness. Such business models are a city phenomenon. I believe there is hardly any room for growth for Zomato as far as cities are concerned.
FAANG, as most people know, stands for Facebook, Amazon, Apple, Netflix, and Google. The only way people are going to get off Facebook is if they get bored of it. It is next to impossible for users on FB to use another platform because, for that, their entire network has to move first. Amazon - I mean Jeff Bezos struck gold with AWS but he got everything right with his business model in the first place, killing or engulfing the competition. Apple - Apple has unique products and a loyal fan base. They provide an unparallel user experience with their products. Netflix - There is a unique content on the platform and people are willing to pay for it. Google - I mean there is no need for someone to switch to a different search engine. All these companies have unique business models that generate tons of cash and there is no reason for consumers to switch from these platforms. That is not the case with Zomato. If Amazon tomorrow provides steeper discounts, people can say goodbye to Swiggy and Zomato. Also, 2 fewer apps on the phone.
At some price and with some more clarity on generating profits, Zomato can be bought. There is scope for growth in Zomato but one has to get in at the right valuation. I don't think Zomato's listing is India's FAANG moment and the results of its listing should not be used by investors to invest in other startup IPOs.