Modern tech firms that generate billions in revenue but are not yet profitable include Paytm, Delhivery, Zomato, and Policybazaar. Due to this, investors on the secondary market are hesitant to buy these equities until they start to turn a profit.
Even major investors who had made anchor book investments in these businesses are now selling their shares after the IPO lock-in period, which for several of them ended in November, expired.
As per the sources, the Head of retail research at HDFC Securities, Deepak Jasani said that because new-age tech firms’ business models are complex and are undergoing significant disruption, investing in their stock is best left to high-risk investors rather than the general public.
Furthermore, he warned that the longer it takes for such businesses to break even, the greater the likelihood that rivals will enter the market directly or indirectly. Investors need to have some idea of when these businesses will become net positive and EBITDA positive.
Earnings before interest, taxes, depreciation and amortization are referred to as EBITDA. The stock price of Nykaa, one of the internet companies, has changed since bonus shares were given one day after the anchor investor lock-in period expired. The stock is still down from the high levels it reached after the IPO.
The regulator may tighten the regulations regarding bonus/split shares in response to Nykaa’s action. According to the sources, it claims that the market regulator SEBI is mulling a rule requiring corporations to distribute bonuses and split shares to shareholders within a specified time frame. The Nykaa bonus share problem is said to have spurred this action.
Low Awareness over Profitability
There has been a significant sell-off in tech firms due to the shaky market, and they all share the trait of showing no evidence of profitability. Analysts think there are several factors contributing to the share price collapse of these new-age enterprises, including insufficient market liquidity, high valuations, and a lack of clarity on profitability.
According to Jasani, these stocks’ primary triggers are significant increases in customers, visitors, or foot traffic because these factors will increase their profits. In nine out of ten cases, this might not occur, and it can be challenging to pinpoint which of these tech firms will succeed, according to him.
Tech firms losings massively
Based on the sources, an investment analyst, Ambareesh Baliga said that Going forward, only the companies that have visibility of positive cash flows and a timeline for when the company will reach true EBITDA positive could experience a rebound. Until then, underperformance may be seen as secondary market investors recovering from their initial excitement.
Investors purchased into these new-age tech firms in the year 2021 when they announced their initial public offerings (IPOs), as these brands were well-known and investors had heard a lot about them. Investor interest can be seen in the IPO subscriptions of Nykaa, Zomato, and Policybazaar—companies that are currently making fun of their poor financial performance.
Zero Desire for Risky Investments
As per the sources, the vice president and head of research at Sharekhan, Sanjeev Hota said that no one was checking on profitability information when these new-age tech firms first debuted on exchanges; instead, everyone was more interested in the potential disruption of the digital economy. However, now that there is insufficient liquidity, these tech firms are suffering as a result of several uncertainties over their valuation, profits, and capital burn.
He added that the market is experiencing a liquidity crisis as central banks throughout the world raise interest rates. Companies like Bajaj Finance that have strong balance sheets and good business visibility can currently defend their premium valuation.
According to the research by JM Financial, Delhivery could achieve breakeven status by Q4FY23, and Paytm, PB Fintech, and Zomato are all forecasting adjusted EBITDA level profitability between Q4FY23 and Q2FY24. Check this site from StockTwits here.
Furthermore, Hota also said that these platforms leveraging various technologies to operate enterprises are beneficial; nevertheless, it is unclear how long the capital burn will last and how long it will take for the platforms to turn a profit.