Underperformance since listing and delayed profitability timelines are common threads
Like Zomato, sharing or gig economy businesses such as ride hailing, food delivery and renting of space have triggered a lot of frenzy during their IPO and on listing globally. However, these stocks have a shared history of sub-par returns post listing, with clear path to profitability missing.
Out of 7 big global listed names in this space, two that had a bumper listing like Zomato — Airbnb and Door Dash — have not given any returns since listing. Worse still, US-listed Uber and UK-listed Deliveroo, fell 7.5 per cent and 26 per cent, respectively, on their listing day. Though these two stocks managed to eke out marginal gains since then, this does not count for much as they have been big underperformers vis–a-vis the markets.
While Uber has managed to give 14 per cent returns since its closing price on listing day in May 2019, the tech-heavy Nasdaq Composite index has delivered returns of 87 per cent during the same period. While one could argue that the Covid outbreak impacted these companies, this may not be entirely true.
Food delivery company Door Dash in the US, for instance, saw its business sky rocket during the pandemic. Uber, too, benefitted largely as its food delivery business Uber Eats rakes in as much revenue for the company now as its ride hailing business. This apart, the underperformance in these stocks was playing out even before the pandemic. Of all the global sharing economy stocks, only the Chinese company Meituan has bucked the trend.
While growth is exciting, profits are reassuring. The high valuation of sharing economy stocks are being justified with examples of multi-baggers such as Alphabet (Google), Amazon and Facebook. However, these companies were profitable by the time they got listed or soon after.
In contrast, sharing economy stocks fare poorly on profitability. Many of them have been in existence for more than a decade but have still not reached profitability even at the EBITDA level. This factor may be reflecting on their stock price, though the expected revenue growth remains strong (see table). Meituan is the only exception, showing an adjusted EBITDA margin of 1 per cent in the last twelve months. This performance though can be attributed to its broader e-commerce platform too, rather than its food delivery business alone which brings around 50 per cent of the revenues.
In early part of last decade, there was a lot of hype around a famous discount driven loss-making company called Groupon. Google offered to buy it for $6 billion valuation in 2010 which the company rejected and launched a successful IPO with $12 billion valuation in 2011. However, today it is a shadow of its former self, trading at valuation of around $1 billion. Besides, the profitability challenge has created strange bedfellows with fierce competitors merging: Uber merged its Chinese business with Didi and Uber Eats in India tied the knot with Zomato. Even fierce rivals in the US market — Uber and Lyft — have discussed merger in the past, but backed off on valuation.
There is no reason why sharing economy companies in India will fare differently from their global counterparts on the profitability front.
Often, high valuations for Indian companies vis-à-vis global peers are justified based on the market potential that entities here have. For instance, Zomato’s gross order value is only around 3 per cent of the addressable food services market, as per estimates in its prospectus. But this penetration level is not much different from that of Uber at the time of its IPO in the US. Then, the company said that its market share was only 1 per cent of the total market for personal mobility.
No case for ‘Indian’ premium
This implies there is not much of a case for India -based or India-focused sharing economy companies to trade at significant premium versus global peers. This is also validated by the expected growth rates for these businesses, which seem to be similar across geographies. The FY20-22 revenue CAGR (Bloomberg consensus estimates) expected for all the global companies discussed here as well as Zomato are around 40-50 per cent. That being the case, Uber now which derives significant part of its revenue from the same segment as Zomato but trading at around 20 per cent of Zomato’s valuation, may be a better bet.
However, the jury is still out on how this segment of the internet economy will ultimately make its mark. In the meantime, the performance of global sharing economy stocks post their IPO shows that investors are ultimately looking for profitability, post the initial excitement.