3 Reasons Why Zomato’s Stock Plummeted 7% Following Q3 Results
Zomato Stock: Zomato shares took a hit, dropping over 7% on January 20 following the announcement of its December quarter results. The Street was less than impressed with the outcome for a few key reasons:
1) Aggressive store expansion: Zomato saw a significant 57% decrease in third-quarter profit due to ongoing pressure on margins from the expansion of its Blinkit quick commerce platform. Despite an improvement in food delivery margins, the company reported a 14% decline in consolidated Adjusted EBITDA, amounting to Rs 45 crore. This was primarily attributed to the substantial investments made in expanding the quick commerce store network, resulting in a quarterly loss increase of Rs 95 crore. Zomato’s CEO, Deepinder Goyal, aims to reach 2,000 Blinkit stores by December 2025, a year earlier than previously anticipated.
Goyal explained that the increased losses in the quick commerce business were a result of accelerating growth investments that were originally planned to be spread out over several quarters. Despite the current setbacks, Zomato remains optimistic about achieving its target of 2,000 stores by December 2025.
2) Growth slowdown: The Gross Order Value (GOV) growth in the food delivery business only saw a 2% increase sequentially, signaling a slowdown in demand that began in the second half of November. Rakesh Ranjan, CEO of the Food Delivery Business at Zomato, acknowledged the current challenges but expressed confidence in a forthcoming recovery. Despite the short-term hurdles, Zomato remains positive about achieving its long-term goal of 20%+ yearly GOV growth in the food delivery business due to its strong fundamentals.
Zomato provided an update on the District app, stating that while the core business remains profitable, the quarterly loss in Q3FY25 was primarily due to investments in the new District app, including team, marketing, and tech costs. Moving forward, the focus will be on transitioning customers to the new app and expanding the selection on the platform. Although operating at a loss is expected for the next year, it is not anticipated to significantly impact Zomato overall.
Regarding the rise in employee costs, Zomato mentioned that these costs are expected to remain high in the near future. The increase in ESOP charges and cash employee benefits expenses was driven by the growth in headcount, particularly in the quick commerce and going-out businesses. Additionally, the competitive landscape has led to higher costs for retaining and acquiring talent in the quick commerce sector. This trend is likely to continue, keeping total employee costs elevated in the short term.
Akshant Goyal, Chief Financial Officer of Zomato, stated that the company aims to reduce total employee costs to 6-8% of Adjusted Revenue by FY26.
In terms of financial performance, Zomato reported a 57% decrease in third-quarter profit, attributed to increased spending on expanding centres to meet orders on the Blinkit quick commerce platform. Despite this, revenue from the food delivery business saw a nearly 22% increase, while revenue from Blinkit more than doubled in the quarter.
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