Grab Holdings: Grabbing Market Share In A Sea Of Challenges (NASDAQ:GRAB)

tupungato/iStock Editorial via Getty Images Investment Thesis Grab Holdings (NASDAQ:GRAB) is a developer of a super-app that provides ride-sharing/hailing, delivery and financial services like digital payments and banking. Right now, only its ride-sharing segment has a long-term track record of profitability. However, given that the company has already captured the majority market share in the Southeast Asian (“SEA”) region, it is unclear whether Grab can continue to grow significantly in this segment. Indonesia is the only market in SEA that Grab has yet to gain a majority share in the ride-sharing segment, and it is facing formidable competition, especially from Gojek. Although Grab started as a ride-hailing business, its delivery business currently accounts for the lion’s share of its overall revenue. Its delivery business has just turned profitable after many years of negative adjusted EBITDA. In my opinion, Grab needs to ensure its profitability in this segment is sustainable so it does not become a deadweight in Grab’s overall business model in the long run. In the delivery business, worthy competitors exist and are eager to claim market share in a business with a relatively low barrier to entry. Hence, investors should consider whether such profitability is sustainable in the long run. The company’s financial service segment is still at its nascent stage and is currently not profitable. Grab was one of 4 applicants chosen by the Monetary Authority of Singapore (“MAS”) to operate Singapore’s first digital banking services. MAS imposes stringent criteria for awarding such licenses, including the “ability to manage a prudent and sustainable digital banking business”. This suggests MAS has significant confidence in Grab’s business model. Still, without precedence of success in managing a similar financial service business, Grab’s ability to achieve success in this segment in the long run remains unclear. The company is currently overvalued, even if we calculate the intrinsic value with an optimistic assumption that its growth in top-line revenue will largely trickle down to its free cash flow (“FCF”). Hence, I maintain a hold rating on the company for now. Company Overview Grab has achieved phenomenal success since its inception in 2012. It started as a ride-hailing business in Singapore. It was not the first player to enjoy the first-mover advantage in this market. However, it has performed well enough to grab market share away from Uber in 2018. It took over all its operations and is now the dominant ride-sharing and food delivery business in Singapore. It was so successful that the governments of both Singapore and Malaysia have, on different occasions, called for investigations to ensure Grab does not take advantage of its dominant market position to engage in anti-competitive business activities. Moving forward, the company aims to become a successful super-app similar to Tencent’s WeChat. Mobility (ride-sharing) Segment Grab is a leading ride-sharing service, primarily in South East Asia (SEA). According to Statista: In a survey conducted in August 2021, a majority of respondents across all surveyed Southeast Asian countries chose Grab as their most used ride-hailing application. In Malaysia, Grab was chosen by 94 percent of the respondents. Market Share (Statista) While competitors exist, we can observe from the chart, Grab’s ride-sharing services are overwhelmingly used by most countries in SEA. The only exception is perhaps Indonesia, where Grab’s service was chosen by just slightly more than 50% of respondents. Gojek’s popularity is significant in Indonesia and comparable to Grab. Hence, investors should consider whether Gojek can materially challenge Grab’s dominance in the long run. Given that Grab has already secured the majority market share in other SEA regions, for this segment of Grab’s revenue to continue growing significantly, the company might feel pressured to pour more resources to capture the Indonesian market. After all, according to another survey by Statista, among SEA countries, Indonesia has, by far, the fastest-growing E-commerce users in the region: From the selected regions, the ranking by number of users in the E-commerce market is forecast to be led by Indonesia with 99.1 million users. In contrast, the ranking is trailed by Singapore with 4.9 million users, recording a difference of 94.2 million users to Indonesia. Securing its dominance in the Indonesian market might be akin to securing Grab’s overall dominance in the larger SEA region, since this is the only market in SEA that it has yet to dominate. According to a more recent study by Measurable AI, as of 2023, the tug-of-war between Grab and Gojek for the Indonesian market has reached a stalemate of 50% each: Market Share (Measurable AI) In the same study, only 8% of users used both Grab and Gojek. Market Share (Measurable AI) This suggests there is little room for both competitors to co-exist in the long run. Consumers are more likely to choose just one service over the other. Therefore, Grab’s performance in the Indonesian market is something that investors need to pay attention to. Delivery According to GuruFocus, Grab’s revenue in mobility is only the second-largest source of revenue. The company derived most of its revenue from its delivery services. Revenue (GuruFocus) While Grab gets its lion’s share of its revenue from its delivery segment, this segment has only turned profitable in 2023 as reported by the company’s latest annual report. Adjusted EBITDA (Annual Report) From the annual report, we can observe that mobility is the only segment that has a consistent track record of profitability and has grown steadily in the last 3 years. Can Grab’s delivery segment maintain such a profitability trend in the long run? According to Grab’s Investors Relations website: The strong growth was primarily attributed to a reduction in incentives as a percentage of GMV, GMV growth, and a change in business model of certain Deliveries offerings in one of our markets. In my opinion, since Grab is still able to maintain GMV growth despite a reduction in consumer incentives, it suggests a heightened level of loyalty among its users. Therefore, the profitability of the delivery segment observed in 2023 should be sustainable in the long run. Still, I am only cautiously optimistic about Grab’s long-term profitability in the delivery business. After all, the delivery business is inherently relatively low in switching costs. With the availability of multiple food delivery platforms that are easily downloadable, it is relatively easy for both businesses and consumers to switch between different platforms with little penalties. Most likely, the preferences for most people will boil down to cost, meaning existing players like Grab will eventually have to compete on price-cutting. A price war will almost certainly hurt the margins of all players, including Grab, at least in the short term. However, such a strategy might still work in Grab’s favour. According to The Low Down: “As of end 2023, Grab is estimated to account for 55.0% or US$9.4B of the region’s food delivery GMV, a 6.8% increase from the year before.” “Foodpanda and Gojek are estimated to contribute 15.8% (US$2.7B) and 10.5% (US$1.8B) of the region’s GMV, a 12.9% and 10.0% YoY decline respectively.” “Shopee and Lineman showed notable growth and are estimated to contribute 8.8% (US$1.5B) and 8.1% (US$1.4B), respectively, to the region’s GMV.” As a current leader in the food delivery platform that is already commanding more than half of the region’s food delivery GMV. Hence, in my opinion, Grab is likely to have established a materially stronger brand over its competitors. This suggests it’s likely to be hurt the least in the event of a price war. Still, as a business that does not have a consistent track record of profitability, investors should watch closely whether the recent profit is sustainable in the long run. Financial Services This segment includes the company’s “payment, lending and insurance products”. It is crucial for Grab if the company intends to fulfil its vision of becoming a super-app in the SEA region. Operating in Singapore, Grab offers banking services via GXS Bank, which competes primarily with 2 other digital banks, Trust Bank and MariBank. GXS is a fully digital banking service backed by Grab itself and Singtel (the country’s largest mobile network operator). Trust is backed by Standard Chartered Bank and FairPrice Group (the largest supermarket chain in Singapore) MariBank is owned by Singapore tech giant Sea Group. Each of these players has its sizable user base to leverage when trying to upsell/cross-sell their relatively new fintech services. Notably, Grab’s GXS and MariBank are awarded full ‘digital licenses’ while Trust has a ‘full bank license’, meaning Trust can offer a full suite of banking products and services, including cash withdrawals from ATMs like a traditional bank as opposed to GXS and MariBank, which are fully digital. In my opinion, a full digital license might allow Trust to gain more customers from an older customer demographic who are already used to having a physical banking experience. However, in the long run, the overhead of maintaining these legacy infrastructures might weigh materially on the operator’s profitability. As reported by Fintech News: Rising consumer adoption has pushed merchants to follow suit with now over 90% of digital merchants accepting payments digitally, the research found. Over the next one to two years, 92% of digital merchants expect to continue using or increasing their usage of digital payments, with e-wallets as their top choice. The national push for e-commerce adoption should act as a significant tailwind, especially for MariBank and GXS, which operate without the costly baggage of legacy banking infrastructure currently borne by traditional banks. However, according to CNA, authorities from the MAS have also maintained their commitment to ensure cash payments continue to co-exist with digital payments. we are not aiming to be a cashless society. Cash will continue to be a familiar and convenient way to transact Such an arrangement should benefit players with “full digital license” like Trust with a business model that services banking customers from a wider spectrum. Right now, it appears to be too early for investors to pinpoint the player that will rise above the competition to capture the majority market share of the digital banking space. Company Financial Profile Overall, the company has only posted one profitable quarter since its inception. How does it fare on an annual basis? Key Financial Figures (Author’s Calculations) Looking at some key financial figures extracted from seeking Alpha’s compilation of the company’s balance sheet and cash flow, we try to gather some insights: Despite not being profitable in its bottom line, Grab has consistently maintained a high level of current assets over and above what it sustains in current liabilities, providing the company with a very comfortable working capital to keep its business operating smoothly. Grab used to have an enormous amount of debt in 2019 but has since reduced it dramatically. The latest reported debt volume of $298M is a far cry from that of 2019. As reported by the Straits Times, the CFO explained that the company’s ability to reduce its loan is attributed to its “healthy cash position”, allowing Grab to “generate interest savings” in an environment of high interest rates. Grab has maintained a net cash position on its balance sheet since 2021 due to these debt reductions. With a net interest income (instead of expense) since 2023, the company has effectively freed itself from the burden of high-interest expense due to the prevailing heightened interest rate. Notably, Grab has also achieved positive FCF since 2023. This is the first time the company had a positive FCF after being negative since 2019. Investors should observe whether this FCF can be maintained and even increased in subsequent years. Risks While we noted Grab has executed its growth strategies well enough to achieve its first adjusted quarterly profit in 2023, competitors still exist due to the low switching costs, especially in the delivery business landscape. This might derail Grab’s path to continued profitability. The company is expected to invest significantly in capital expenditure to effectively capture market share in the Indonesian market to maintain its dominance in the mobility segment. The company’s financial services segment is also in its nascent stage of development and is expected to require substantial funds to grow and rise above its competitors. These factors might materially reduce its FCF and negatively affect the company’s valuation. Valuation Grab does not have a long-term track record of positive FCF. Its operating cash flow just turned positive in 2023. We will have to make a few assumptions about the company’s future expected growth to value the company using the discounted cash flow model (“DCF”) model. According to Seeking Alpha’s growth projections, Grab is expected to grow its top-line revenue by slightly more than 30%. This is reasonable, as the company has consistently grown its revenue by double to triple-digit percentages since 2021. Growth Rate (Seeking Alpha) We assume that this estimated 30% top-line growth will largely trickle down to its FCF and use it in our DCF calculation. Earlier, we calculated the last reported FCF of the company is $156M. We will use this as the starting FCF figure. The WACC figure of 10.5% will be used in our calculation. This is taken from GuruFocus. Other required figures are taken from Seeking Alpha’s balance sheet figures. Intrinsic Value (Author’s Calculations) Based on the above inputs, the intrinsic value is about $2.56. Assuming a current market price of $3.54, the stock is 27.67% overvalued. Conclusion Out of 3 main business segments, Grab is only consistently profitable in one of them, which is the ride-sharing business. This is also the business that the company started with since its inception. It has made remarkable progress in diversifying its business to the delivery and financial services segment. It even has the ambition to position the company as the go-to super-app in the region. The company does have several advantages over its competitors in terms of dominance in market share. It also displayed prudence in managing its cash and debt in the current environment of heightened interest rates. However, Grab operates in an environment with relatively low barriers to entry and significant competitors exist, as discussed earlier. The current price is also overvalued. As such, investors should hold and wait until the price becomes at least fairly valued (if not undervalued) to achieve a higher margin of safety. Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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