Why are digital stocks like Zomato and Nykaa staging a comeback?

Something seems to have changed in terms of sentiment surrounding the digital stocks. Stocks like Zomato which had cracked sharply just a few weeks back, has bounced more than 25% in a span of just 5 trading sessions.

The same is true of other digital stories like Nykaa, Paytm, PB Fintech etc. Is this just a dead cat bounce or is something fundamentally changing in these stocks?

A recent note by a leading domestic broker has pointed to the fact that many of these digital companies like Zomato present real and credible business models. Sometime back, the prices were totally out of sync with the perception of value in the market.

However, with the recent correction, that has also been rectified. In short, when the prices of these digital stocks cracked, their valuations came down but business prospects stayed constant.
 

It is hardly surprising that brokers are beginning to see a lot of hidden value in these digital stocks at lower levels. Even after the recent rally, a stock like Zomato is still more than 50% below its post-IPO peak price.

The focus has been on the companies with managements that are sticking to their core beliefs. Also businesses that have consistent business models, a large captive market and a strong franchise are being preferred in the digital space.

One thing that has changed for the positive in these digital plays is that their valuations are starting to look more compelling as they are fighting to reduce the cash burn. Tough times normally bring about a greater sense of financial discipline and amidst fears of an economic slowdown, there is a rising level of such discipline.

That is also favourably impacting the valuations of these companies. The pain may not be over, but optimism is surely there.