Grab: Building A Super App (NASDAQ:GRAB)

Investment Thesis

Grab Holdings Limited (NASDAQ:GRAB) went public through a SPAC merger with Altimeter Growth Corp. The company was valued at $39.5 billion in equity value and $30.4 billion in EV (enterprise value, making it the largest SPAC deal to date. The stock price went up from $10 to $17 right after the merger, but has been plummeting since. It is now down over 80% from its high last year trading at $2.76 currently.

This is partly due to the broad sell-off in high-growth stocks amid the fear of rising rates and inflation, but it is also because Grab failed to deliver the financial performance it forecasted in its Investor Presentation prior to the merger. However, I believe the TAM (total addressable market) for Grab is huge, as it is now expanding to businesses beyond ride-sharing and food delivery. This provides a huge opportunity and upside for the company if they are able to capitalize on it.

After the massive drop in its share price, the company is now trading at a market cap of around $10 billion, which I think is fair. Therefore, I rate the stock a hold at the moment as we wait and see if management is able to execute and deliver.

Introduction

Grab is a ride-sharing and food delivery company founded in Singapore in 2012 by Anthony Tan. It is not a popular name in America or Europe, but it has been a household name in Southeast Asia.

Grab started as a pure ride-sharing company in Malaysia with the intention to provide safer and more efficient taxi services by connecting passengers with private hire and taxis. After gaining some traction, they started to expand their service into other countries like Singapore, Thailand, the Philippines, Indonesia, and Vietnam. It also started launching more flexible ride-sharing options such as business rides, premium rides, coach rides, and more.

The company also acquired Uber’s (UBER) business in SEA (South East Asia), making it the ride-sharing leader in the region. According to the company, it now has a 71% market share in the ride-sharing market. In the last few years, Grab is trying to grow beyond being just a ride-sharing company. It is rapidly expanding into other sectors and aiming to build a super app in SEA.

Super App

A lot of industries in Southeast Asia are really fragmented. Grab is trying to consolidate these industries’ services together by building a super app that is able to fulfill customers’ daily needs all in one place. I believe this is the right direction for the company, as it significantly increases its product breadth and TAM. They introduced GrabExpress and GrabFood. GrabExpress is an on-demand delivery service with live GPS tracking that helps customers send documents, items, and more. Whereas GrabFood is a food delivery service. This is smart, as the company already has a lot of drivers, therefore the two expansion is very easy and smooth.

Then they launched GrabPay, one of the most important products, essentially the heart of their Super app. It provides customers a digital wallet and card which they can use to store, pay, and transfer money easily. This is important as it allows customers to easily pay for any product in the app, and also allows the company to process all the payments. It also introduced GrabRewards, a rewards program for app users, in order to drive customer engagement. The company now provides products such as Insurance, auto investing, loans, BNPL, and more. It is also introducing new partnerships with companies like McDonald’s (MCD) and Starbucks (SBUX) to offer electronic payments in their stores.

The company is starting to form its own ecosystem and the Grab app is so important to customers that they can’t live without it. From ordering food, booking a taxi, paying bills, investing, and shopping online, the Grab app got you all covered. The company is currently operating in over 400 cities across the SEA region and serving 24 million monthly active users. I believe the Super App is poised to continue its strong growth as the total addressable market in SEA is huge and its penetration rate is still low compared to other continents like North America and Europe.

According to Grab, the total online food delivery market will be valued at $170 billion in 2025, while the mobility market and digital payment market will increase to $235 billion and $1.3 trillion, respectively, in 2025. Besides, currently, only 17% of the population in SEA is engaged in digital payment compared to 42% in China and 82% in the US. These numbers show that SEA is still in the early innings of online disruption and provides a huge opportunity for Grab. As the company further expands its service, the engagement from users will continue to increase, which will further strengthen Grab’s Super App.

Financials and Numbers

Part of the reason the company missed its forecasted financials is due to the lockdown in SEA in 2021. With ride-sharing being its biggest revenue stream, the lockdown significantly impacted its financials. It also reduces the usage of the e-wallet, as customers aren’t able to shop and spend outside. This situation unprecedentedly affected the progression of its Super App. From the chart below, you can see that the company’s mobility GMV (gross merchandising volume) dipped from December 2020 to August 2021 but has been recovering strongly since. Monthly transacting users also reached an all-time high of 27.7 million after bottoming last year. I believe this uptrend will continue as COVID cases ease.

For the full year of 2021, Grab reported revenue of $675 million compared to $469 million a year ago, representing an increase of 44%. GMV increased 29% from $12.5 billion to $16.1 billion, a record high for the company. Deliveries and financial services reported GMV growth of 56% and 37% respectively, which offset the 14% YoY drop in mobility. Its e-wallet and food delivery now have market shares of 21% and 51% in SEA, respectively. It guided GMV for Q1 2022 to be around $6.3 billion and forecasted GMV growth of 30%-35% for the rest of the year. The company also ended the year with $9 billion in cash, which allows them to take the cash burn and further invest in the business.

The top line for the company is strong but the bottom line is disastrous. The loss for FY21 is $3.6 billion and an adjusted EBITDA loss of $842 billion. It is expanding quickly, but cost control is something to keep an eye on going forward. I expect the company will post a profit soon as financial revenue starts to ramp up, it also has a much stronger margin profile compared to the mobility and delivery segment.

This is the same approach that SEA (SE) and Mercadolibre (MELI) are doing. Cost synergies will also start to kick in as users start to use more products. In 2018, only 21% of customers use more than 2 products, the percentage has now increased 1.7 times to 56%. As the apps scale, the company will be able to have better leverage, which I believe will improve profitability.

Valuation

Despite the massive drop in share price and market cap, the company’s valuation is still expensive. At the current price of $2.84, it has a PS (price to sales) ratio of 11.7. From the chart below, you can see that it is significantly more expensive than other ride-sharing and food delivery companies like Uber, DoorDash (DASH), and Lyft (LYFT). It is trading at almost an 8x premium compared to Uber and Lyft.

However, Grab is a much more diversified business with a much larger opportunity. Much of its valuation is valued on its potential to grow its financial service segment and build other high-margin products by leveraging its huge existing customer base. It is definitely not cheap by any means, especially if you value it using traditional metrics, but I think the current valuation is fair given the growth runway the company has.

Risk

Much of my thesis is based on the company successfully scaling its Super App by expanding its product offerings and increasing engagement. Therefore, management’s execution will be key going forward. If they fail to grow their financial service segment and improve their profitability, the valuation may compress quickly to levels similar to Uber and DoorDash.

The current macro situation may also post some potential headwinds. As inflation persists, consumers may start spending less which will affect the GMV of their e-wallet. Higher gas costs may also reduce the take rate for the mobility segment and reduce the number of drivers, which will further hurt margins.

Conclusion

In conclusion, I believe Grab’s Super App has a huge potential going forward. The SEA market is expanding quickly while penetration rates still remain low. This provides a huge opportunity for further expansion. The company also has a huge existing customer base that it can leverage.

GRAB has been executing well by launching new products and increasing partnerships. It has also managed to live through the unprecedented headwind caused by the lockdown, which shows the management’s strong ability to execute. The company’s valuation is elevated, especially when compared to its competitors. However, Grab’s business is a lot more diverse and has a much larger TAM.

I believe that, if Grab is able to continue to execute well, it can grow into its valuation relatively quickly. I rate the company as a hold for now.