Like Zomato, sharing or gig economy companies like ride hailing, food delivery, and space leasing caused a lot of excitement during their IPO and global listing. However, these stocks share a common history of sub-par post-listing returns with a lack of a clear path to profitability.
Most of them have had delays in reaching breakeven points and reporting profits and are still making losses on an operational (EBITDA) level. There is no reason Indian companies should be any different. Investors should therefore look before they jump.
Out of 7 big globally listed names in this space, two that had a bumper listing like Zomato – Airbnb and Door Dash – have stopped giving returns since listing. Worse still, US-listed Uber and UK-listed Deliveroo fell 7.5 percent and 26 percent, respectively, on their trading day. While these two stocks have managed to make marginal gains since then, that doesn’t count for much as they have been big underperformers against the markets.
While Uber has posted a return of 14 percent since its closing price on the trading day in May 2019, the tech-heavy Nasdaq Composite index achieved a return of 87 percent over the same period. While it could be argued that the Covid outbreak affected these companies, this may not be entirely true.
For example, the Door Dash grocery delivery company in the US saw its business soar during the pandemic. Uber also benefited largely from this, as its Uber Eats grocery delivery business now brings in as much revenue for the company as its ride-sharing business. That said, the underperformance of these stocks happened before the pandemic. Of all the stocks in the global sharing economy, only the Chinese company Meituan bucked the trend.
While the growth is exciting, the gains are comforting. The high valuation of shares in the sharing economy is justified with examples from multi-excavators such as Alphabet (Google), Amazon and Facebook. However, these companies were profitable at the time they were listed or shortly thereafter.
In contrast, shares in the sharing economy do poorly on profitability. Many of them have been around for more than a decade, but have not yet reached profitability even at the EBITDA level. This factor can have an impact on their share price, although expected sales growth remains strong (see table). The only exception is Meituan with an adjusted EBITDA margin of 1 percent in the last twelve months. However, this performance is also due to the broader e-commerce platform and not just the grocery delivery business, which generates around 50 percent of sales.
At the beginning of the last decade there was a lot of hype surrounding a famous, discount-driven, loss-making company called Groupon. Google offered to buy it for $ 6 billion in 2010, which the company turned down and launched a successful IPO in 2011 with a valuation of $ 12 billion. Today, however, it’s a shadow of itself, trading at a valuation of around $ 1 billion. Plus, the profitability challenge has created strange bedfellows with the merger of fierce competitors: Uber has merged its Chinese business with Didi, and Uber Eats in India has tied the knot with Zomato. Even bitter competitors in the US market – Uber and Lyft – have discussed a merger in the past, but withdrew on the valuation.
There’s no reason sharing economy companies in India will fare any differently than their global counterparts in terms of profitability.
Often, high ratings of Indian companies compared to global competitors are justified due to the market potential of the companies here. According to estimates in the sales prospectus, the gross order value of Zomato is only around 3 percent of the addressable catering market. However, this level of penetration is not much different than Uber’s at the time of its IPO in the US. Then the company said its market share is only 1 percent of the total personal mobility market.
No case for an ‘Indian’ premium
This means that there is little to speak for India-based or India-focused sharing economy companies trading at a substantial premium over global competitors. This is also confirmed by the expected growth rates of these companies, which appear to be similar across regions. The expected CAGR sales (Bloomberg Consensus Estimates) for all global companies discussed here as well as Zomato for fiscal year 20-22 are around 40-50 percent. In that case, Uber now, which makes a significant portion of its revenue from the same segment as Zomato but trades at around 20 percent of Zomato’s valuation, might be a better pick.
However, the jury is still open as to how this segment of the internet economy will ultimately profile itself. Meanwhile, the post-IPO performance of global sharing economy stocks shows that after the initial excitement, investors are ultimately looking for profitability.