Food delivery stocks are still struggling as concerns about their business model, profitability, and competition remain. In India, Zomato (ZOMATO) share price plunged by more than 10% on Wednesday, bringing it closer to its all-time low. Similarly, in the UK, Deliveroo (LON: ROO) shares crashed by almost 2%.
Why is Zomato crashing
Zomato is a leading food delivery company whose main operations are in India, a country that is doing better than most of its emerging market peers. Together with Swiggy, the two companies control over 70% of the market share, making it a duopoly in the sector.
Like other companies in the food delivery industry, Zomato has historically been focused about growth at the expense of profitability. The idea is that spending on growth was necessary to gain and maintain market share.
Zomato had a net loss of 23.86 billion INR in 2020 as the pandemic shuttered its business. It then narrowed the loss to 8.16 billion in 2021 and widened it to 12.2 billion in FY’22. The most recent results showed that its consolidated loss narrowed to 2.51 billion rupees while its revenue rose by 62%.
Analysts believe that the company will likely have a better year in 2023 as inflation eases and business conditions improved. The management believes that profitability will likely happen in 2023 or in the coming year.
A likely reason why the Zomato share price plunged is the announcement that it was seeking to hire 800 people. In a statement, the company’s CEO Deepinder Goyal said that it had 800 vacancies across five roles, including generalists, product managers, and software development engineers.
This is a swift change considering that the firm had major layoffs in 2022. At the same time, many tech companies, including moneyed firms like Microsoft and Alphabet are laying off staff. Another likely reason is that the company relaunched Gold, a subscription product that offers discounts to members.
Zomato share price forecast
The Zomato stock price worked well as I had predicted in another publication last week. At the time, I wrote that the shares would crash by about 20%, which is what happened on Wednesday. This view was easy to see since the shares had set a head and shoulders pattern that is shown in black. This pattern, as I noted in my SPY article, is one of the most accurate in the industry.
The shares remain below the 25-day and 50-day moving averages. Therefore, since this plunge happened in a high-volume environment, I believe that there could be more to come. This could see it move to an all-time low of 41.40 INR.
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