Should you buy Grab?
Grab. The Makings of a SuperApp! Equity Research! Part 3/3.
Welcome to the 3rd and final part of my Grab Deep Dive!
In the first part, we discussed how Grab came to dominate the 700M people-strong region of Southeast Asia!
Meanwhile, in the second part, we explored Grab’s network effects and took a look at the competition!
For those extra curious, feel free to check out Parts 1 and 2!
Today, I am going to explain Grab’s biggest opportunities (290M underbanked people) and take a look at its finances. Lastly, this report will conclude with the valuation (200% upside? Maybe)
1. Opportunities
2. Financial Analysis
3. Valuation
4. Conclusion
1. Opportunities
By now, it is clear that Grab is quite a popular company, however, as investors, we should invest in companies that have ample opportunities for growth.
Let’s take a look at how Grab could grow its business!
Financial Services
Southeast Asia has a large unbanked and underbanked population of 290 million people. Even more strikingly, with an estimated 50% of the population being underbanked, the region has more people with mobile phones (73%) than people with bank accounts.
Grab’s mobile-first financial platform is well-positioned to gain 10s of millions of new users in the next decade!
Grab already had 23.3M fintech customers in 2023. I estimate the company could reasonably have 57M+ customers by 2030.
Having capital to fund loans is only one part of the equation, as some banks spend upwards of 10% of their revenues on marketing to originate loans. Once a loan is issued, a bank incurs various expenses such as servicing, collections, customer service, and more.
Grab’s mobile-first, automated, digital platform has the potential to originate billions of dollars in loans from its network of restaurants, drivers, merchants, and customers at much lower origination costs than other financial institutions.
In addition to having lower origination costs, Grab could have smaller losses from defaults!
Grab can use the data from its platform of how similar businesses in the area are performing to better assess credit risk. Banks usually don’t have such detailed data.
Moreover, Grab has a real-time view into the borrower’s business. It can modify loan offers based on changes in a merchant’s earnings and reassess the risk profile to amend interest rates. Additionally, in case of delayed payments, Grab has a nuclear option to close a merchant’s Grab account.
Most importantly, it can set automatic repayments. By withholding a certain sum or percentage from a borrower’s real-time earnings, the company lowers credit losses. This means that loan repayments to Grab are prioritized over other expenses. When borrowers have financial problems, they have to decide which bills to pay, and loans are often the last. This way, if a borrower goes out of business, it is likely Grab’s credit losses are smaller than if the payments wouldn’t be automatic.
Another opportunity is the booming buy-now-pay-later (BNPL) industry. BNPL services have become hugely popular in Europe and the US, allowing customers to make a purchase today and pay for it later. This is a short-term loan that is often repaid after a month or two. However, the main difference from a conventional loan is that BNPLs often don’t charge interest. Instead, they bill the merchants 3-7% of the purchase price, who in return benefit from higher volumes.
UnaFinancial estimates that the BNPL market of Southeast Asia will grow from $14.7B in 2023 to $53B by 2027!
Grab, with its ecosystem, is set to benefit. BNPL is a great alternative to credit cards, which haven’t seen strong adoption in the region.
Apart from growing existing financial services offerings, there is massive potential to add additional services.
Millions of Southeast Asian employees work abroad and send funds home to help their families. Signing partnerships with Wise, Revolut, or Remitly to grow remittances could not only generate fee income but also support continued GMV growth. For instance, just the US-Philippines corridor generated $31.4B in remittances in 2021.
Moreover, Southeast Asian consumers and businesses are heavily underinsured, with insurance premiums as a % of the GDP sitting at 2-4%, compared to the 7% global average. There is significant potential to offer health, travel, and life insurance to its customers, and vehicle, liability, and risk insurance to its merchant partners. By partnering with large insurers and reinsurers, Grab could generate high-margin fee income without holding the insurance risk.
Additionally, even though in 2023 Grab closed its investment product, GrabInvest, there is potential to try again once Grab becomes profitable. Grab closed the division as they didn’t believe it to be viable in Singapore, as the adoption was low, and expenses were probably higher than they expected.
Advertising
As discussed in the previous chapters, 42M customers spend almost $1.5B each month on the platform. These customers have higher than average disposable incomes and have indicated a clear intent to spend money. Advertisers are always looking for ways to expand their audience, and Grab’s digital platform provides them with a unique opportunity to engage with a digitally native customer base.
There is untapped potential to generate high-margin income with advertising!
How much an advertiser is willing to pay is always determined by the expected revenue of said advertising. Luckily, Grab’s platform enables merchants to advertise to higher-than-average intent customers. A pizzeria can advertise itself to those with a history of ordering pizza.
Additionally, Grab’s proprietary location data could enable businesses to advertise to customers in the vicinity of their business. A customer taking a taxi to a scenic area could be advertised as a spa salon, cinema, or a particular restaurant.
Advertisers pay higher prices for targeted, relevant ads as they generate a better return. Grab’s customers generate a lot of data, enabling the platform to potentially have above-average targeting.
For instance, Uber said that their advertising revenue reached a $1B run rate in Q2 2024. Their LTM GMV then was around $150B, which would equate to a 0.67% take rate. A similar take rate for Grab would mean $121M. Grab doesn’t disclose advertising revenue, but it is probably significantly lower.
It is likely that as the platform matures, Grab will not only reach similar advertising take rates as Uber but also higher.
I estimate Grab could generate about $600M in advertising revenue by 2030!
GrabUnlimited
Amazon Prime is one of the most successful subscriptions in the world. With over 200 million subscribers, it generates billions from fees and rewards Amazon’s most loyal customers with incredible perks.
Prime is designed to increase the order frequency, reduce the need for promotions, and lower churn.
GrabUnlimited wants to mirror Amazon’s success with Prime!
In Thailand, Unlimited costs just 99 THB per year, around $3. With certain limitations, Unlimited offers free food delivery, discounts on mobility, and other perks. The subscription pays for itself after just a few orders, making it a no-brainer service for Grab regulars.
Such benefits lock customers in Grab’s ecosystem as they want to get the discounts they “pre-paid” for, increasing stickiness and reducing churn. Additionally, an Unlimited customer is less likely to price-compare, reducing the need to always have the lowest prices.
This is where customer psychology comes into play. Due to the perception of incredible savings, subscribers often feel they are getting good value for money because of the upfront subscription fee, even if individual services aren't always the cheapest.
Additionally, a large base of Unlimited subscribers would enable Grab to reduce marketing expenses and cut promotions. Most importantly, Unlimited members order more frequently and have higher average tickets.
Once Unlimted has reached maturity, the dollar cost of rewards will be much lower than the subscription revenue + increased order frequency + lower marketing expenses + potentially higher prices!
The genius of Amazon Prime is that its benefits are not limited only to the e-commerce store but across the ecosystem. As Grab further develops its SuperApp ecosystem, it will similarly broaden the benefits of Unlimited, adding more discounts and perks, further strengthening the ecosystem and increasing its appeal to potential partners.
Once GrabUnlimited has millions of members who have built their daily lives around the service, the company will increase prices. Each price increase will have a disproportional effect on profitability, as the costs to provide the rewards will grow much slower than prices.
SuperApp
Grab defines a “Super App” as the following:
“superapp means an integrated mobile application of many applications that aims to provide a one-stop marketplace platform with multiple offerings delivered via a single technology platform and third-party integrations.” Grab 2023 Annual Report
A Super App is comparable to a digital cruise ship. Just as cruise passengers rely on the ships’ restaurants and other services because there are no alternatives at sea, users of a Super App are encouraged to use its integrated services without ever needing to leave. Cruise lines want passengers to remain on the ship as long as possible to increase their spending. Grab has a similar goal. It wants users to never leave their “digital cruise ship”. Unfortunately for Grab, it is much easier to change apps than it is to leave a cruise ship, so the company must find new and innovative ways to keep the users “on the ship”.
The better the offering, the less likely customers are to leave the ship!
Convenience, not price, is the key driver behind the adoption of Super Apps. If everything is available in one app, a certain subset of customers will not compare prices, rather, they will book what is available simply because it is easy, fast, and convenient.
It would be inconceivable, take too long, and be very expensive for Grab to develop all features of such an app in-house. The whole concept of a Super App involves building deep and beneficial business partnerships to increase the range of services available. Why would companies partner with Grab?
Because people are used to spending money on the platform! Thus, Grab has a degree of trust that partners can tap into to generate sales!
This is one of the reasons Booking.com partnered with Grab. For most people, hotel bookings are infrequent but high-ticket items.
Booking has the tech backend and relationships with millions of hotels, but its presence in Southeast Asia is less strong. By integrating with Grab, Booking can use Grab’s payments network to tap into 42M customers and $17B GMV to increase sales. Whilst Grab can increase customer engagement and generate commission fees.
Furthermore, as Grab rolls out more features, its appeal to partners will increase, enabling Grab to potentially capture a larger share of the economics of a partnership.
Lastly, Grab’s financial services division could benefit tremendously. As mentioned previously, the platform has incredible potential to originate lots of loans at low customer acquisition costs. A SuperApp would turbocharge the GMV, enabling financial services to power it all.
Customers who use Grab’s BNPL solution have 25% higher payment volumes and 22% more transactions per user. Drivers who have used Grab’s financing do, on average, 13% more rides than those who don’t. Meanwhile, merchants with financing have 22% more transactions.
The more services Grab offers, the more people use the app, increasing the GMV. Higher GMV motivates merchants and partners to join the Super App, further increasing Grab’s appeal to customers.
A Super App ecosystem has the potential to stimulate network effects, driving exponential growth!
2. Financial Analysis
In LTM, as of Q3 2024, Grab had revenues of $2.7B, EBIT of -$217M, Net Income of -$127M, OCF of $627M, and FCF of $475M!
Let’s take a deeper look!
Sales Growth
In the last twelve months, Grab had sales of $2.7B, and if Wall Street Q4 estimates are accurate, they will close the year with sales of $2.8B.
This means that, from 2020 to 2024, Grab grew sales by 499%, a CAGR of 56%!
In 2024, Grab’s revenue growth slowed down compared to the previous years, with the company only set to grow 19% Y/Y.
This is a significant de-acceleration from 65% growth in 2023, 112% in 2022, and 41% in 2021!
Revenue growth in 2020 was 156% because Grab had negative revenue of $845M in 2019. The company recognizes customer and partner incentives as reductions of revenue, not as a cost. As we discussed in the customer acquisition section of this report, Grab heavily incentivizes drivers, merchants, and customers to use the platform.
Meanwhile, in 2021, Grab’s mobility business dealt with disruptions caused by the pandemic, and while the delivery segment grew significantly, it was very small, just 22% of the total revenue.
Furthermore, during 2022 and 2023, Grab saw a huge growth as the pandemic restrictions caused delivery business to explode. Grab is another company that, instead of experiencing a “time travel” effect in its business, saw their growth pulled forward a few years.
I think it is likely that in the next few years, the growth will re-accelerate, as the financial services division is still in its infancy.
Revenue Composition
The delivery segment brought in $1.45B for Grab in LTM, 54% of the total revenues. Meanwhile, the mobility segment is 37% of the company, around $1B. Lastly, financial services generated $233M, 9% of revenues.
The delivery business has grown by 100% in the last 2 years as Grab grew usage per customer and expanded geographically. Additionally, as just mentioned, the company benefited substantially from pandemic lockdowns turbocharging the demand for food delivery.
In 2022, the mobility business gave up its position as Grab’s largest segment. Since then, the difference has become greater, as the segment grew by 56%, 44% points lower than the delivery.
While financial services constitute only 9% of Grab’s business, the segment is the most promising, growing 264%.
In the above graph, we can observe the geographic split of Grab’s business. The top 3 countries generated 75% in 2023, 29% came from Malaysia, 26% from Indonesia, and 20% from Singapore. While Singapore is Grab’s smallest country by population, it’s the wealthiest one in Southeast Asia, likely enabling Grab to have much higher margins than in other regions.
Meanwhile, Malaysia is showing incredible strength, as revenues grew by 640% from 2020-2023 to $673M. However, I find it likely that Indonesia will become Grab’s largest market. Despite intense competition with Gojek, sales there grew by 1,092% to $605M.
GMV, Payments, and Take-Rate
In LTM Grab’s, customers spent $17.5B on what the company calls “On Demand services”, this includes mobility, delivery, and others but excludes financial services. Meanwhile, the financial services division recorded $5.2B in transactions in 2023, excluding GMV-related transactions.
Grab discontinued reporting financial services GMV. The company said this was for “strategic reasons”. Likely, this was done because investors often look at the GMV take rate to assess how effectively platform businesses monetize their platform. Financial services have completely different dynamics, leading to much lower take rates, significantly reducing the overall GMV take rate.
I wouldn’t be surprised if, in the future, Grab will disclose gross payment volume of the financial services business.
Since 2019, GMV has grown by 102%, a CAGR of 16%!
In the above graph, we see that GMV growth slowed down quite noticeably, from 30% in 2021 and 23% in 2022 to 12% in 2023. This was largely caused by the Covid growth pull forward, as GMV growth reaccelerated to 16% in 2024.
If Grab executes on its SuperApp ambitions, I could see the GMV growth reaccelerating to 20%+!
Grab’s take rate after incentives in LTM was 14%, a significant increase from 10% in 2022. This shows Grab’s strategy in action. Use mindboggling incentives to get as many partners and customers as quickly as possible, and then once their market position is solidified, slowly cut incentives.
The company has a clear path to reach a 20% net take-rate by 2030!
In 2019, the financial services segment processed $3.58B, by 2023, volumes had grown by 44.9% to $5.2B, a CAGR of 9.7%!
In 2023, the unit saw a 10.7% decline in transaction volumes, likely due to reduced incentives. While financial services could become a huge profitability driver for the company, currently, this unit is quite unprofitable.
Despite a fall in transaction volumes, financial services revenue grew 177% in 2023. This means that the net take rate was 3.4%, a significant increase from 1.1% in 2022.
Profitability and Cashflow
In LTM Grab’s operating and net losses were $217M and $96M, whilst operating and free cash flow’s were positive $573M and $497M.
The graph above shows that the losses in the company’s early years were staggering, with Grab losing over $3.5B in 2019. Today, the company has a negative net income of $96M. However, Wall Street analysts forecast that the business will become GAAP profitable in 2025.
Additionally, the company is cashflow positive even when accounting for share-based compensation!
In the LTM, Grab spent $296M on share-based compensation, 11% of the revenue. This is a significant reduction, as in 2021 and 2022, the company spent 53% and 29% of revenues on SBC.
Grab’s improving economics are also visible in its margins. Gross margins have grown to 41.6%, up from -58.5% just a few years ago. EBIT stands at -8.1%, up from -230.4%. Net income improved to -3.6% from -511%. Lastly, FCF is positive 18.5%, an increase from -152.1%.
Looking at segment adjusted EBITDA, we see that Mobility is the most profitable, with ADJ EBITDA of $544M, a 54% margin, while Deliveries made $195M, a 13% margin!
The economics of the mobility segment are more favorable as it requires fewer incentives and has only a single supply partner(the driver), enabling higher take rates. Deliveries involve two partners (driver and merchant) and require higher promotions.
Meanwhile, Grab had a negative ADJ EBITDA of $127M in its finance division, a margin of -55%!
This is a significant improvement from 2023, when the division lost $170M, an ADJ EBITDA margin of -96 %.
This business is still in its infancy and uses a lot of resources in building and promoting the service.
Balance Sheet
Now that Grab is on a path of becoming a significant player in the financial services industry, it is crucial that the company keeps a healthy balance sheet.
As of LTM Q3 2024, Grab has $1.1B of customer banking deposits and $5.8B cash on its balance sheet. Since bondholders redeemed the convertible note in 2021, Grab has had relatively little debt, with debt falling to $328M in Q3 2024.
Adjusting for customer deposits, Grab has a healthy net debt position of -$4.4B!
In Q1 2022, customers had deposited only $36M on their wallets, which means that in barely 3 years, Grab has grown deposits by 30X. Furthermore, in 9 months of 2024, customer deposits grew by 192% from $374M.
Additionally, as of Q3 2024, Grab has an outstanding loan balance of $498M, an increase of 81% Y/Y.
There is huge untapped potential to increase deposits by onboarding millions of unbanked people on the platform. Once onboarded, these people are likely to borrow funds and transact on the platform.
Overall, Grab has a strong balance sheet with ample assets to pay its liabilities and room to raise debt if necessary!
3. Valuation
With a market cap of $19.7B, Grab currently trades 7 times LTM sales and 40 times FCF. The company is currently unprofitable, but Wall Street analysts expect that to change soon. Taking Wall Street estimates into account, FWD 2026 P/E is 46, while P/FCF is 27.
The valuation indicates that investors are pricing in a lot of growth for the company. Let’s have a look at what this growth could look like.
Base Case
In this Base Case valuation model, I have calculated the potential monthly active users for each segment, GMV for Mobility and Delivery, and ARPU for Financial Services.
I model that the delivery segment will grow users with an 11% CAGR, a little bit faster than the 10% CAGR of mobility. Meanwhile, considering the opportunity to onboard underbanked people, I could see Grab growing financial services customers with a 13% CAGR.
In this scenario, segment users would reach 42.16M, 42.65M, and 52.2M, respectively!
Next, I model GMV per user of delivery and mobility segments growing with 8% per year, the same pace as the fintech gross ARPU.
The result of these assumptions is $35.4B Delivery GMV, $17.5B Mobility GMV, and a Financial Services gross ARPU of $36.4!
For delivery, I model slight improvement in take rate from 23% today to 26% in 2030, while the mobility segment could improve from 20% to 24%.
Next, as outlined in the report, Grab will scale back incentives. Although the company doesn’t disclose them per segment, I tried to reverse engineer them. I find it likely that due to the nature of the business and the growth stage it is in, the financial services segment requires the largest incentives as a % of gross revenue. I estimate Grab will reduce financial services incentives from 64% to 30% of gross revenue by 2030, while delivery incentives may drop from 44% to 33% and mobility from 21% to 18%.
To calculate advertising revenue, I assume Grab can achieve a 1% GMV take rate, slightly above the estimated 0.67% GMV take rate of Uber.
The outcome is $6.16B in delivery revenue, $3.48B from mobility, $1.46B from financial services, and $530M from advertising!
Similarly, as with incentives, operating margins per segment are not disclosed, but I used the ADJ EBITDA to estimate them. I model the delivery margin improving from -19.2% to 7%, mobility from -4.2% to 11%, and financial services from -105.5% to 15%. Lastly, I assume 100% of advertising revenue goes to the bottom line.
The end result is revenues of $11.6B, operating profit of $1.77B, and net income of $1.24B!
Assuming 4% yearly dilution and an exit P/E of 40, the Base Case model sees a 92% upside to Grab’s current $5 share price, a CAGR of 11.5!
Bull Case
Grab bulls will argue that my assumptions are too conservative, so let’s improve them a bit.
In the Bull Case, I model delivery users not at 42.16M but 44.49M, mobility not 42.65M but 45M, and financial services not 57.24M but 67M.
The result of these assumptions is Delivery GMV going from $35.4B to $39.5B, Mobility GMV going from $17.5B to $19.6B, and Financial Services gross ARPU going from $36.4 to $41.4!
Next, I leave the take rates alone but reduce the incentives, delivery from 33% to 23%, mobility from 18% to 14%, and financial services from 30% to 26%.
Such a scenario would lead to revenues of $7.9B in delivery, $4B in mobility, $2.05B in financial services, and $708M in advertising!
The final result of the Bull Case is that compared to the Base Case, revenues are 26.7% higher at $14.7B and net income 53% higher at $1.9B!
These improved assumptions result in a 212% upside to the current stock price, a CAGR of 20.9%!
4. Conclusion
In conclusion, Grab is in a process of transforming from a simple taxi app into a diversified super app!
The business enjoys strong revenue contributions from delivery ($1.45B), mobility ($1B), and financial services ($233M). Additionally, thanks to strong top-line growth and disciplined cost control, Grab is on a path to achieve GAAP profitability in 2025.
I would describe Grab’s competitive position in its home region of Southeast Asia as very strong. Gojek has been struggling to compete and, in addition to exiting Vietnam, has been losing share in its home country of Indonesia.
Gojek’s weak performance means that Grab has no large direct competitor!
In short, Grab’s leading mobility market share in conjunction with the GrabUnlimited loyalty program and expanding financial services business position Grab to benefit from strong network effects.
Furthermore, Grab is well-positioned to benefit from Southeast Asia’s economic growth turbocharging the demand for its services!
An estimated 350M people will be members the middle class by 2030. I find it to essentially be a certainty that this new middle class will increase their use of conveniences such as reliable taxis, fast delivery, and innovative financial services!
In the last twelve months, Grab’s 42M users spent $17B on the platform. I see a clear path for Grab to add 10s of millions of new users and $10s of billions of GMV.
However, as the valuation section showed, this is not a slam dunk, the company must execute incredibly well.
If Grab executes, I see a 92% to 212% upside by 2030.
Ultimately, the success of the financial services division and their Super App ambitions will determine the upside. In regards to financial services, investors need to pay attention to customer deposit and loan growth, stagnation in these metrics could show holes in its growth story.
Additionally, I will be watching out for new partnerships that expand the Super App. The booking.com venture should be just the beginning, and if new partnerships are not signed soon, it might be a sign that Grab’s Super App ambitions are nothing but a marketing gimmick.
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I linked to your post in my Monday EM links collection post: https://emergingmarketskeptic.substack.com/p/emerging-markets-week-february-17-2025
I like in KL and mentioned this in my Dec 30 post (https://emergingmarketskeptic.substack.com/p/emerging-markets-week-december-30-2024 has the imbedded links):
"The Murray Hunter Substack has noted a lengthy tweet about how SE Asian ride sharing superapp Grab Holdings Limited (NASDAQ: GRAB) has followed the old ‘Air Asia’ playbook with its online booking scam of inserting a “compulsory” 30 sen (roughly several US cents) insurance charge on rides that is hard to opt out of for future rides (if a customer even notices it on their receipt). That may sound like a small charge, but consider this:
'Wee looked at the potential extra revenue that might come Grab’s way in this extra add on. If we accept the figure of 2.5 mil rides per day as stated by Grab in its website, the additional daily income is RM750,000 [US$167,821.5] - the monthly extra income is RM22.5 mil!! [US$5,034,645]
This is a similar business model used by Air Asia in the past. They got fined for this in Australia some years ago. Grab now sees this strategy as a blue ocean until its closed off.'
I rarely need to use taxis or ridesharing apps - so I can’t comment - other than to say that Malaysians have been telling me for years that Grab is “expensive” in Malaysia and to use other (I guess local…) ride sharing app alternatives..."