Zomato, Paytm, and Nykaa: Here’s how the stock could fare

If I ask you to name three stocks that come to mind when I say ‘new-age tech stocks,’ chances are good that we’ll be talking about the three stocks mentioned in the title.

In fact, these stocks have become synonymous with rapid growth and IPOs at sky-high valuations.

Investors didn’t really care about the profits of these firms. As long as the story was hot, they were sure of making a return on their investment. Furthermore, one of these firms, Nykaa, was already profitable at the time of its IPO.

All three firms had great long-term growth stories… and investors liked them. All three had solid listings when they entered the primary market with their IPOs.

It seemed that nothing could go wrong.

But then it did.

As I write this FSN Ecommerce (Nykaa) is 77% below its listing price, despite a massive 5:1 bonus issue To stop the decline.

Zomato is down a little over 50% from its listing price.

And Paytm is down almost 65% from its listing price.

By the way, their falling from above is even worse. Here is a table of returns of these tech stocks since their inception.

The destruction of wealth in these stocks has happened on a massive scale. Most of the investors who did not sell are sitting on huge losses.

So this all gives rise to some obvious questions…

Are these stocks a ‘buy’ or ‘avoid’ for those who do not have them in their portfolio?

Are these shares a ‘Sell’ or a ‘Hold’ for those who have them in their portfolio?

These are very difficult questions to answer.

But in this editorial, we will consider Zomato, Paytm and Nykaa and see the current status of these stocks. Then you, reader, can make the call.

#zomato

Despite the massive fall, there are still people who are bullish on the stock. Recently, it jumped nearly 50% from its all-time low.

But clearly, the trend is still down… unless there is a significant amount of buying to propel the stock up and prevent it from falling below its all-time low.

Our view on Zomato is well summed up by analyst Aditya Vora…

To begin with, everything was wrong about these new age tech IPOs when it came to valuations.

How can Zomato, a loss-making company that burns cash every year, have a market capitalization of Rs 1.4 trillion at its peak? At the same time, Jubilant Foods, which sells Domino’s Pizza, making massive profits, was trading at half the valuation of Zomato.

I am sure you must have seen people talking about Zomato at the cost of tomatoes. What a huge fall it was from a high of Rs 160 to a low of Rs 42.

We can debate about Zomato and whether it is a good investment or not. But what I am trying to say is that such stocks should be viewed in relation to their counterparts in India and abroad.

At a market cap of Rs 1.3 lakh crore, buying Zomato was a no brainer. But at 0.3 ton does it make sense to play the Indian food delivery market?

Well, everything is good at a price in the stock market. We just need to find out what that price is.

Aditya also did a video on the stock – Time to Buy Zomato?

Now the fundamentals of the company are improving. It’s not all bad for the stock.

So here’s what we can say about Zomato…

If you don’t have the stock in your portfolio, you’ll need to decide whether the decline in the stock is enough to warrant taking the long call. In other words, does it provide an adequate margin of safety or not?

You also have to be comfortable with the idea that the stock could fall further. After all, it is still a loss-making company. In such a situation, in the event of a decline in the overall market, this stock can come down from its all-time low. Are you comfortable with this?

Now if you are holding the stock then your action will depend on your purchase price.

Are you sitting on a huge paper loss? If so, consider the possibility that the stock could go up over time as the company’s fundamentals improve. This will reduce your loss but it will take time.

If your loss is minor or if you bought it near a recent low when it is in the green, your actions will depend on why you bought the stock. Was it to speculate on the price? Or was it a long term investment?

If you have bought it for speculation, you need to have a clear exit price in mind.

If you have recently bought it as a long term investment, you will need to closely track the improvement in the fundamentals of the company and also assess the story regularly. Is it playing to your satisfaction?

Now that we have covered various possible Buy, Avoid, Hold and Sell scenarios for Zomato, let us also consider Paytm and Nykaa.

#paytm

Before LIC there was Paytm.

When it hit the market in November 2021, it was India’s biggest IPO. The propaganda was massive. The stock market sentiment at that time was quite positive.

The Rs 183 billion (Rs 18,300 crore) IPO received bids for over 91.4m shares against a total issue size of around 48.4m shares. The retail category was subscribed 1.66 times.

The journey since then has not been a pleasant one as the stock is on a one sided decline.

We have seen how damaging a sale after the lock-in period is over, post listing, for pre-IPO investors can be. The stock has been affected by large block deals involving these pre-IPO investors.

There doesn’t seem to be any respite as the company is still far from stopping its cash burn or turning nominal profits.

So what should we do in this case?

Well, the situation is slightly different as compared to Zomato.

Other than its size and brand name, Paytm doesn’t have any serious competitive advantage (i.e. moat) to speak of. For example in its payments business, there is no barrier for a user to switch to Google Pay or any other service from using Paytm.

Thus, if you do not have the stock in your portfolio, it makes sense to closely track the fundamentals and invest only when you are sufficiently confident that the company is not only on the path to profitable growth and positive cash flow, But it also has a strong, long-term competitive advantage.

On the other hand, if you own the stock, the situation is similar with Zomato. Why did you buy the stock in the first place? The answer will determine your next course of action in the stock.

#heroine

It is now a profitable company…and that’s one thing that sets it apart from the rest.

It can be evaluated by traditional metrics like PE and PB. We need not worry about cash burn as the company has mostly overcome this challenge.

Furthermore, it appears to be a competitive advantage (i.e. the moat). The brand is synonymous with beauty, wellness and fashion for women.

Plus, the sheer scale of products it offers, at multiple price points, has made it a compelling, and highly convenient, online marketplace for women. Its premium retail store strategy is also moving in the right direction.

This is a company with a viable brand that its customers return to time and time again. That would give it at least some pricing power over the long term.

Unfortunately, none of that matters right now because of the stock’s valuation. It provides zero margin of PE security of around 200. This is one such stock which having PE of 50 would do better. it’s so expensive.

Now that doesn’t mean the stock can’t go up…but if it does, the PE will go up even more.

Equitymaster co-head Tanushree Banerjee did a video on stocks – Is Nykaa a falling knife?

So what’s to be done with Nykaa?

If you don’t have the stock in your portfolio, you need to seriously ask yourself whether you are comfortable making purchases without a margin of safety. This is the kind of stock that can fall even if fundamentals improve because its valuations are too high.

Ask yourself what is the highest PE you are willing to pay for this stock and how much the stock would have to fall for the PE to reach that level.

If you have the stock in your portfolio, we believe you need to take a good, hard re-look at your reasons for buying it.

We understand that selling at a loss is painful… but you must decide to hold without a margin of safety. In that case, you are essentially expecting a huge increase in the net profit of the company which would justify the higher PE.

in conclusion

Please note, this editorial does not constitute a recommendation to buy, avoid, hold or sell any of these stocks.

The idea was to highlight how investors should think when faced with the scenario of taking action on a stock that has declined greatly.

We hope this editorial has provided some insight into the thought process required to buy, avoid, hold or sell these three stocks.

By the way, Brijesh Bhatia, Principal Chartist, Equitymaster, made a video on these three stocks based on technical analysis.

you can Watch Brijesh’s video here,

Happy Investing!

Disclaimer: This article is for information purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated equitymaster.com