Grab Stock: Upgrading Our Rating To Hold Based On Valuation (NASDAQ:GRAB)

We began coverage on Grab (NASDAQ:GRAB) when it was still a SPAC, rating it a Sell based mostly on valuation but also the significant losses. Since then, shares have lost about two-thirds of their value, and we thought this makes it an interesting time to revisit the company and see if the shares are attractive now.

For an intro, we recommend readers to refer our previous Seeking Alpha article here. For now, we’ll only point out that the biggest attraction to investing in Grab is that it is South East Asia’s most important ride-hailing service but also the most important super app in the region, with services ranging from logistics to food delivery, to payments, etc. These other services are at an earlier development phase compared to ride-hailing but could eventually become more important.

Financials

As can be seen below, the market cap of the company was about $40 billion after completing its merger with the SPAC but has since declined to ~$13 billion. Keep this number in mind for when we compare it to the economic size of the activity that takes place on its platform, as well as the revenue the company generates.

The forward EV/EBITDA has become much more reasonable at ~13x, especially given that the company continues to grow revenue and GMV at a decent pace.

A couple of things give us some hope for the business. One is that users are increasingly signing up for more than one product, increasing the monetization opportunities for the company and a bigger chance it can quickly recoup is customer acquisition cost (CAC). The other is that as users engage more with the app, retention is improving and customer churn goes down. If these factors continue processing in the right direction, the company has some hope of eventually becoming profitable.

Now that the valuation has meaningfully come down, our remaining objection is that the company still has an extremely elevated cash burn. In fiscal year 2021, adjusted EBITDA was -$0.8 billion, and that is before considering depreciation, amortization, interests, and very generous stock-based compensation. Once these items are added, the loss is multiple times higher. At least GMV, or the amount of economic activity on its platform, came above guidance at $16.1 billion. The fact that GMV is now above the market cap is what makes us believe that the company is no longer too expensive, if, and that is a big if, it can find a way to become profitable.

The good news is that the company is guiding for a GMV re-acceleration in 2022, with growth increasing to 30-35%. The two key indicators to watch closely in Grab’s case are GMV and adjusted EBITDA margin.

It seems the company is aware that current losses are making investors anxious, so it included a slide on its most recent earnings presentation where it predicts it will reach adjusted EBITDA breakeven by the first half of 2023 for the core food deliveries segment and adjusted EBITDA breakeven for the whole of the deliveries segment by the end of 2023. The company also believes that it has room to improve mobility margins to ~12%.

At this point, we believe the risks and rewards are fairly balanced. On one side, the valuation is a lot more reasonable with the market cap below the GMV which continues to grow at a good rate. The company is also promising profitability improvements. On the other side, the cash burn remains very elevated and there continues to be intense competition to the company’s offerings.

Conclusion

Southeast Asia is one of the most attractive digital economies in the world and is still in the early innings of online disruption. Grab appears poised to become its most important super app. We believe that, after the significant price correction, risks and potential reward are more balanced, so we are changing our rating to Hold. Long-term investors in the company should follow profitability developments closely, as they will determine whether they make a profit on their investment or not.