Chances are, if you live outside Southeast Asia, you might not be familiar with Grab Holdings (NASDAQ:GRAB). Grab is often described as Southeast Asia's equivalent of Uber (NYSE:UBER) or Uber Eats but it goes further by functioning as a super app. It is a leading Southeast Asian super app that provides services for ride-hailing, food and grocery deliveries, package shipments, and even financial transactions. Grab's app offers a comprehensive platform that empowers consumers to perform these daily activities seamlessly.
Grab became a public company through a SPAC merger at the end of 2021. Unfortunately, investor sentiment toward the stock has been bearish since its listing. However, while the stock's performance has disappointed, the underlying business has experienced a remarkable transformation, particularly in terms of financial performance. The company has made significant progress in driving operating profits, especially within its largest segments: deliveries and mobility.
In this article, I will explore Grab's ecosystem, its competitive advantages, and its potential as a long-term investment.
Grab's EcosystemGrab has developed a super app that allows consumers to commute, order groceries and takeout, pay bills, and send packagesall from a single platform. This ecosystem spans eight Southeast Asian countries, including Singapore, Malaysia, Indonesia, and Vietnam, collectively serving a region with a population of over 680 million people with a combined GDP of $3.6 trillion.
Source: Hey innovations
The app's main revenue drivers are Deliveries and Mobility. Consumers use Grab Food for meal deliveries, Grab Mart for groceries and retail shopping, and Grab Express for package pick-up and delivery services. On the mobility side, services like Grab Car, Grab Bike, and Grab TukTuk offer convenient transport solutions. Grab's ecosystem extends further with services like Grab Pay for digital payments, Grab Insurance for vehicle and package protection, and Grab Invest for investment opportunities. Additionally, the Enterprise and New Initiatives division has been growing robustly, with Grab Maps and Grab Ads emerging as key contributors to its business.
While none of the individual services Grab offers is groundbreaking, the true competitive advantage lies in its integrated ecosystem. As I noted in my previous articles on Mercado Libre (NASDAQ:MELI) and Coupang (NYSE:NYSE:CPNG), the strength of these platforms comes from the network effects they generate. For Grab, this is evident in how its delivery and mobility segments reinforce each other: More users attract more drivers, which only attract more users.
Moreover, the introduction of financial services has made Grab's platform even stickier. Grab Rewards, for example, encourages frequent transactions by allowing users to earn points, progress through tiers (from Bronze to Platinum), and enjoy exclusive benefits. I find this approach similar to Starbucks' (NASDAQ:SBUX) strategy, where users preload accounts to purchase coffee. Similarly, Grab's rewards system creates loyalty while effectively providing the company with interest-free loans until points are redeemed.
In addition to its sticky ecosystem, Grab's deep understanding of Southeast Asia's geographic and cultural complexities creates both significant barriers to entry and operational challenges. The mutually reinforcing growth of users and drivers strengthens the platform's appeal, making it increasingly difficult for competitors to match the scale and efficiency Grab offers.
With that in mind, Grab's dominance has forced even global players to exit the market. For instance, Uber attempted to establish a foothold in the region but eventually sold its Southeast Asia operations to Grab, taking an equity stake in the company instead. Similarly, Delivery Hero, a smaller competitor in the delivery space, reportedly explored selling its Foodpanda business to Grab due to its inability to achieve profitability.
These examples highlight the difficulties competitors face in navigating this dynamic market and underscore Grab's strong, entrenched position in the region.
Founder-ledGrab's story begins with its co-founders, Anthony Tan and Tan Hooi Ling, who met at Harvard Business School. Their vision was to address the transportation inefficiencies and safety issues that plagued Malaysia. CEO Anthony Tan, in particular, took a bold step by going against his father to build Grab. Coming from a prominent Malaysian family that owns one of the largest automotive distribution companies in the region, Tan was expected to inherit and run the family business. However, he chose instead to pursue his own vision, despite opposition from his father.
This decision highlights Anthony Tan's deep conviction and commitment to Grab's success. In cultures where family legacy often takes precedence, going against such expectations is rare and signifies a profound personal stake in the company's future. This demonstrates Tan's strong skin in the game, reflecting his determination to prove the success of his vision. For investors, this level of commitment aligns with long-term strategic interestsa quality I value highly in companies. Additionally, Tan owns 3.9% of the company's outstanding shares while controlling 64% of the voting rights, giving him significant influence to steer the company toward its long-term goals.
FinancialsSince its public listing, Grab's revenue has more than tripled, driven primarily by its Deliveries segment, which surpassed Mobility as the largest contributor, generating over $1.3 billion in 2023. Each of Grab's business segments has demonstrated impressive sales growth over the past three years. In Q3 2024, Deliveries grew 13% to $380 million, Mobility grew 17% to $271 million, and Financial Services grew 33% to $64 million.
Source: GuruFocus
One of Grab's most remarkable achievements has been its ability to scale profitably. The company's Free Cash Flow has shown incredible growth, with Grab expecting adjusted FCF to turn positive for FY2024. Moreover, Grab's monthly active users are growing healthy, having reached 42 million, showcasing the vast potential for further growth and engagement. From 2020 to 2023, revenue increased over fivefold from $469 million to $2.4 billion, while expenses rose only 1.7x, from $1.6 billion to $2.7 billion. This demonstrates significant operating leverage and scalability.
Grab's asset-light model further strengthens its financial position. With $5.7 billion in cash and short-term investments, compared to just $328 million in debt, the company maintains a healthy balance sheet. Its total liabilities have decreased substantially over the last three years, even as revenue has surged. This combination of reduced liabilities and increased revenue signals a stable financial foundation. Importantly, Grab achieved profitability for the second time last quarter, a milestone that hints at its potential to sustain regular profitability soon.
RisksLooking at the countries where Grab operates, such as Thailand, Cambodia, Vietnam, Malaysia, and Indonesia, it's clear these are markets on the rise. The economies in Southeast Asia have been improving significantly, and there's a lot of growth potential. However, it's important to acknowledge that these aren't developed markets like Japan, China, or Hong Kong. They are still emerging, and with that comes risk. A regional economic slowdown, political instability, or other unexpected challenges could disrupt these economies and impact Grab's operations.
For example, in the Philippines, regulatory restrictions require foreign companies to be majority-owned by Philippine nationals to operate directly. Grab has had to rely on a joint venture partnership to maintain its presence there. Similarly, in Thailand, not being owned by a Thai national limits the company and imposes strict requirements for operating businesses. These regulatory hurdles highlight the challenges Grab faces as it tries to scale across Southeast Asia.
From a more direct competition, Gojek primarily dominates in Indonesia due to its early mover advantage and local understanding, Gojek competes with Grab in Indonesia, Vietnam, and Singapore. This rivalry is especially pronounced in ride-hailing and food delivery services.
Another competitor, InDrive, uses a unique pricing model where passengers can negotiate fares with drivers. InDrive has been gaining traction, particularly in markets where it has been accredited, like the Philippines. Its model appeals to users looking for potentially cheaper rides or those in less urban or rural areas where traditional services might be less available.
ValuationGrab has a cash position of $5.7 billion, with less than $350 million in debt. With a net cash position of $1.25 per share and a stock price below $4.50, Grab offers a solid margin of safety for investors. That's an incredibly low valuation given rising profitability and cash generation.
Using a discounted cash flow (DCF) model that combines multiple-based approaches and a perpetuity growth model, I estimate Grab's intrinsic value at $7.5 per share, giving an upside potential of 70%. I note that Grab's beta might be considered low compared to its growth stage but this is mainly due to the amount of shares outstanding in my opinion.
Source: Author
ConclusionThe key to Grab's platform lies in its ability to seamlessly integrate into consumers' everyday lives. From the moment a consumer orders breakfast in the morning, commutes to work, and later in the evening orders dinner, pays bills, or shops online, Grab offers a one-stop solution. This convenience is powered by its super app, which consolidates these essential activities into a single platform. As Grab continues to scale and enhance its offerings, the ecosystem becomes even more indispensable to users, reinforcing its stickiness. The company's growing financial strength and operational scalability further underline its potential for long-term success, making it an increasingly attractive proposition for investors.
This content was originally published on Gurufocus.com
