Sea Limited Competitor Grab goes public. Here’s what you need to know
Since its debut on the market in 2017, Sea Limitedof (NYSE: SE) The stock price has climbed more than 1,500%, making it one of the best performing stocks in the world during this period.
Thanks to the wave of digitization sweeping through Southeast Asia, which still lags the United States in terms of internet penetration, Sea’s growth has been nothing short of monumental. Its revenue grew sevenfold between 2015 and 2019, fueled by growth in its gaming, e-commerce, food delivery and digital payments businesses. The rapid increase also encouraged competitors to enter the business.
Investors in search of the next big thing in Southeast Asia are eyeing Altimeter growthof (NASDAQ: AGCU.U) plans to go public with Grab Holdings in what is considered the biggest PSPC deal to date. Sea’s biggest rival, Grab Holdings, is backed by Softbank, known for its first investments in Ali Baba and Uber Technologies. With a valuation of $ 40 billion, Grab will be the largest Southeast Asian company to go public in the United States.
But can it live up to the hype? Here’s what you need to know about the deal, which is slated to close in July.
A great application leader in South East Asia
Grab started in 2013 as an Uber-style ridesharing business, connecting drivers and passengers. Over the years, it has grown into a great app for food delivery, e-commerce, and financial services. Grab today is like Uber, Pay Pal, and Instacart all in one. It operates in 400 cities in eight Southeast Asian countries, associating 25 million monthly users with 5 million drivers and 2 million merchants.
Grab’s biggest business is food delivery, which accounted for $ 5.5 billion of the company’s $ 12.5 billion gross goods value (GMV) last year. In return for connecting food orders with delivery people – and managing the entire shebang, including customer service – Grab collects a 15% commission from restaurants. As Grab has invested heavily to develop this activity, the segment is still not profitable.
On the other hand, Grab’s flagship carpooling service is already profitable on an EBITDA basis (earnings before interest, taxes, depreciation and amortization). This segment has been hit hard due to COVID-19 lockdowns, with GMV dropping 44% to $ 3.2 billion in 2020. Over the years, Grab has increased its share of the ridesharing market. At the same time, its acceptance rates have improved from 8% in 2018 to 20% expected this year.
Like China’s biggest tech companies, Grab’s vast business empire includes financial services like GrabPay, a digital wallet similar to SquareCash App. Grab also offers a range of financial products including loans, insurance and wealth management. It is setting up a digital bank in Singapore, which will offer loans, deposits and other services.
With this wide range of services, Grab wants to create an “everyday app”, allowing users to come back throughout the day to book rides, order meals, make an investment or shop online. As Grab continues to grow its user base, it will naturally attract more traders and drivers. With a growing base of users, merchants and drivers, Grab can deploy even more services. This in turn attracts more users, fueling a virtuous cycle of growing Grab’s user base and services.
Why Grab is well positioned for growth
Grab has grown rapidly over the past three years. Adjusted revenue quadrupled from $ 400 million in 2018 to $ 1.6 billion in 2020, thanks to horizontal expansion into new markets. But Grab is only scratching the surface of a huge market opportunity. Indeed, in South East Asia, sectors such as catering, transport and financial transactions are still in the early stages of digital transformation.
Grab estimates that in Southeast Asia, online food delivery, ridesharing and digital wallet payments captured only 11%, 3% and 17% of their market opportunities, respectively. For comparison, online penetration in these segments in China is 21%, 15% and 43% respectively. As Southeast Asia catches up with China, secular trends towards digitalization are expected to accelerate. As a result, Grab expects its total addressable market to triple between 2020 and 2025, from $ 52 billion to $ 180 billion.
In 2020, Grab held 72% of the regional GMV for hail, 50% of the GMV for online food delivery, and 23% of the total payment volume (TPV) for digital wallet payments. This places it in pole position to ride the expected growth of the market. In addition, Grab’s sheer scale will allow it to offer better services at a relatively lower cost.
For example, restaurants will prefer to partner with Grab Food because it is the largest food delivery service online. As more and more restaurants join the platform, expanding the selection of dishes available in the super app, customers will naturally follow. This creates a snowball effect as the larger clientele attracts more restaurants, and so on. Finally, Grab can leverage its extensive network of drivers to deliver orders quickly, improving the customer experience.
As long as Grab keeps its users and traders happy, it has a good chance of maintaining (or even increasing) its market share.
Yet the path to success will have twists and turns. Competition is Grab’s biggest risk and the company is far from the only game in town. In Singapore and Malaysia, Grab’s main rival is Sea Limited – the leading e-commerce player and a growing digital wallet provider. Sea has also just entered the food delivery space, setting the stage for a turf war with Grab. In Indonesia, Grab faces local players Tokopedia and Facebook– supported Gojek. Gojek and Tokopedia are said to intend to merge, forming a stronger rival for Grab.
That being said, Grab is already the leader in its main verticals and has a good chance of securing its market share. Additionally, its addressable market is huge – large enough for a few gamers.
Should you buy Grab on the day it is listed?
Right now, it’s not hard to see that Grab is well positioned for years of exciting growth. The company plans to increase its GMV and revenue by a compound annual growth rate (CAGR) of 40% and 42%, respectively, over the next three years.
But for investors, Grab’s potential comes at a high price. With a valuation of $ 40 billion, Grab will go public at 25 times its 2020 sales. Uber, for the prospect, is trading at a third of that multiple.
Investors therefore have an interest in staying on the sidelines for now – unless they are interested in high risk, high yield stocks and are prepared to wait for the company to grow in its valuation.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.