In a significant move, Bank of America (BofA) Securities has downgraded the shares of food delivery giants Zomato and Swiggy, citing concerns over growth sustainability, profitability challenges, and increased competition in the Indian market. The firm also cut the price targets for both companies, signaling a cautious outlook for the sector.
BofA Securities Downgrades Zomato, Swiggy Shares; Lowers Price Targets
Reasons Behind the Downgrade
BofA analysts highlighted multiple factors contributing to their decision, including:
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Slowing Order Growth: Despite an expanding customer base, the frequency of orders has shown signs of stagnation, raising concerns about long-term revenue potential.
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Profitability Concerns: While both Zomato and Swiggy have been working towards profitability, rising operational costs and competitive pricing strategies continue to put pressure on margins.
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Regulatory and Competitive Risks: The Indian food delivery space is witnessing growing competition from quick-commerce platforms like Blinkit, Zepto, and even restaurant-owned delivery services, which could erode market share.
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Valuation Adjustments: The recent rally in tech stocks had led to a sharp rise in Zomato and Swiggy’s market valuation. BofA now believes the prices were overstretched, leading to a correction.
Impact on Stock Prices
Following the downgrade, Zomato’s share price saw a sharp dip in early trading, while Swiggy—though privately held—could face challenges in raising fresh capital at previous valuation levels. Analysts warn that short-term volatility may persist as investors reassess the growth potential of the sector.
Industry Outlook
Despite the downgrade, analysts believe that food delivery remains a long-term growth story in India, driven by increasing internet penetration and changing consumer behavior. However, profitability remains the key challenge, with companies needing to strike a balance between growth and sustainable margins.
What’s Next?
Market watchers will closely follow Zomato’s next earnings report and Swiggy’s potential IPO developments to gauge how these companies adapt to the evolving market conditions. Investors are advised to tread cautiously while assessing their long-term bets on the sector.
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