Grab shares are a slaughter.
It’s down 53% since it started trading in the NASDAQ last Dec 2021.
So what exactly happened?
Source: ShareInvestor Webpro
Grab — The “Superapp” of Southeast Asia
At US$12 billion market cap, Grab is the “Super-app” of Southeast Asia. It has three big businesses —
- Mobility: You book GrabCar, GrabTaxi and other ride-hailing services.
- Delivery: You’re hungry. You order food. Food is sent to your home.
- Financial Services: Digital payment wallets and the Grab-Singtel joint venture.
Grab started in Malaysia in 2012, disrupted the taxi business. Then Grab moved to Singapore, disrupted the taxi business. Then Grab grew to other Southeast Asia countries, including Indonesia, Philippines and Thailand.
Today, Grab is more than just a ride-hailing service. It has built itself a “sticky” online platform.
It’s so successful Grab is now a verb — “Hey, I’m hungry, going to call Grab, you want something?”, or “What time already, is your Grab here yet?”
Grab is in the top of mind for consumers.
In fact, Grab’s gross merchandize value (GMV) grew 29% to hit US$16 billion in 2021. That’s almost the size of Laos GDP. It’s also the same value as buying 320 million US$5 bubble tea in a year.
Pretty impressive for a 10 year old start-up.
Grab’s users have also grown to 27 million, higher than any other month in 2021. More users are using Grab services over the last three years. And retention rate (see right chart below) has continued to grow.
Source: Grab FY2021 Presentation Slides
Of the three segments, Grab’s mobility is the biggest.
Last year, mobility business produced US$456 million revenues — more countries are re-opening up their economy. This brought back demand in ride-hailing services
That’s why Grab’s total revenues grew an enormous 44% to US$675 million. in 2021.
Impressive.
Here’s the thing, if Grab is growing their GMV and revenues, why is Southeast Asia’s super-app still losing money?
What Grab Knows That Many People Don’t
You see, for an app to be highly profitable, you need highly scalable merchants (sellers) on the platform.
I’ll explain.
Big e-commerce players like Amazon and Alibaba can gush profits is because their merchants can sell products at scale.
Merchants must sell as many products as possible on the platform without incurring a high fixed costs. Because the more stuff one merchant can sell, it means platforms — Amazon, Alibaba and Grab — can make more money, charge higher fees.
At the same time, big e-commerce platforms must also provide the best tech tools, give incentives and get more merchants onboard the app. More merchants mean more users are attracted to platform.
This what I call a “flywheel effect.”
But the problem is this: Grab’s merchants aren’t like Amazon’s and Alibaba’s merchants — they can’t scale their business.
Think about this: there’s only so much money taxi drivers and private car drivers can make in a day — trading time for money. There’s only so much money food owners can sell a bowl of noodles in a day.
And because of this, there’s only so much fees you can charge on these merchants. Otherwise, merchants will simply jump to another competitor.
Profits are capped. I’d say Grab’s life kind of suck this way.
In its latest fourth quarter results 2021, Grab’s quarterly revenues dipped 44% to US$122 million. And Grab’s losses widened to US$1.1 billion, 73% higher than a year earlier.
Grab is pushing a giant rock up Bukit Timah Hill — It has to keep hiring more staff, invest in new tech to attract merchants, grow their marketing costs and provide more user incentives to maintain their flywheel. It’s not easy.
Does it mean Grab is a foregone conclusion?
Money cannot buy you everything. But it buys you time.
The only way Grab can truly become a profitable super-app is to be numero uno in their delivery and mobility businesses.
Grab must dominate so much and that even its second competitor cannot smell Grab’s backside. If Grab can continue to grow their platform, make it more “sticky”, get over the inertia, this can get Grab’s shares to start soaring again.
Now here’s what I like about Grab.
It has actually financial muscles to grow. It simply needs to pump more cash to grow its users, support its merchants. You know, the usual grind work.
So far, Grab has cash of US$6.8 billion.
Last year Grab burnt US$1.5 billion of cash on operating costs. At this rate, it still has a good four years to turn profitable. Not only that, since it got listed, Grab can raise fresh equity and borrow debt to grow.
Grab has time on its side.
As the economy opens up, ride hailing services will improve.
More and more users are buying Grab’s delivery. According to Euromonitor, online penetration for grocery delivery will more than double between 2022 and 2025.
Grab recently doubled down on this by buying a stake in Jaya Grocer, a huge profitable and leading mass-premium supermarket chain in Malaysia — 44 stores.
Similarly, management also expects their GMV to grow another 30-35% over the next few quarters.
Source: Grab FY2021 Presentation Slides
Lastly, Grab continues to grow its digital payment (financial services) business. Last year, the company’s total payments volume grew 38% to US$12 billion. Revenues in financial services grew 37% to US$21 million. Another big potential for the company
A Grab bonus for shareholders
Grab shares are thrashed so badly, it’s as if the stock market thinks Grab is swimming with the fishes. The interesting thing is, Grab already has a well-developed ecosystem. This could attract big investors to eventually buy out Grab.
Don’t forget, Softbank, Uber and Didi major shareholders of Grab.
Source: ShareInvestor Webpro
Another alternative is Singapore transport and financial companies can also takeover Grab’s delivery and mobility business.
I’ll say it’s a hidden bonus for shareholders.
Safe to Buy Grab?
At such low prices, it could be a speculative buy.
If I were you, I’d be prepared for a strong stomach to withstand all that violent stock movement.
It’s going to take a while before Grab starts realizing its profit potential. For now, it’s going to be a bumpy ride.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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I feel it’s unlikely that Grab will ever be profitable. Don’t forget that Grab has been burning cash without regard for almost 10 years now in an attempt to push out it’s competitors in the ride hailing and food delivery sectors, yet nothing has changed. If anything, the competition has become even more intense. Four more years of the same are not going to make a difference. The barriers of entry are simply too low.
Particularly for food delivery, prices have been artificially depressed for such a long time to a level that is not sustainable. However, customers have come to expect such prices as given, and would abandon any app in droves the moment any player tries to raise them even to a breakeven level.
Another problem is government intervention. Whenever any company comes close to achieving the sort of monopolistic power you described above, governments have almost always taken action to place restrictions on them. After all, it’s not in the public’s interest for such a monopoly to arise. Right now, it’s still an extremely competitive environment, but I am certain governments will step in if a monopoly starts to develop.
This all paints an extremely negative picture for Grab. It has to keep burning cash and running at an ever growing loss just to maintain it’s market position. If it somehow manages to burn enough cash to outlast it’s current competitors, there is nothing stopping an outside player from joining in the moment Grab attempts to raise prices. And again, if it somehow manages to pull off a miracle and prevent outside players from entering the sector, it still has to deal with the interventions from the governments in each of the 8 countries it is operating in – many of whom would look askance at a Singaporean company establishing a monopoly in their country. I just don’t see how it can ever come to a favorable conclusion for Grab.