Deep Dive: Grab (GRAB US)

In-depth look at Southeast Asia's on-demand economy

Summary:

• Grab is Southeast Asia’s dominant on-demand platform for ride-hailing and deliveries. It is also one of the top mobile wallet/fintech player in the region.

• Amidst the dramatic turn in macro and capital markets conditions, incentives spending in the industry seems to be coming down fast and across the board as management teams’ focus shifts to profitability. While share prices of tech companies have been severely punished, the downturn may also be a positive turning point to catalyze more rational industry behavior moving forward.

• Grab is a net beneficiary of Southeast Asia’s brisk pandemic recovery as business and tourism travel normalizes (bookings and driver supply currently at ~70% of pre-pandemic levels).

• Stock price is down ~80% since listing, yet we only think this is approaching fair value (which goes to show the extent of the bubble! But we’ll let you decide)

The past decade

The past decade for the on-demand economy has been a rocket ship. In 2014, Bill Gurley famously claimed $6 trillion TAM for ride-hailing, which quickly swept across the world over from New York to Singapore to Jakarta. On-demand food delivery also came into the scene, and the gig-economy was in full swing. Uber became the most valuable private company in the world, and at one point sought IPO at $100-120 billion, all while still generating losses.

“It was purely a volume business…How many orders, how much GMV can I generate? Irrespective of all of the cost. It was really that high growth rocket ship dynamic…”

– Former Head of Growth, GrabFood Indonesia (Stream by AlphaSense)

As long as the music kept going, everyone was happy. But with the drastic change in capital market conditions since late last year, the music stopped and the game changed. No longer can these businesses rely on an infinite supply of money at higher and higher valuations to fuel their growths. There is no sugarcoating the fact that much of the past had been a growth experiment enabled by the monetary conditions of the time.

Ever since the cycle turned, Grab’s share price has fallen like a rock (down 80% from IPO). We went into the carnage to take a look at Grab with a fresh set of eyes: what next for this business, and is there an investment case to be made?

We assume most of our readers are generally familiar with the Grab story. But if not, here’s a very condensed version: The company was founded by Anthony Tan and Tan Hooi Ling as MyTeksi in Malaysia in 2012. It started as an app for calling taxis, but later added its own driver-partners for ride-hailing, and also expanded into food delivery and payments/financials. Since 2013, Grab started to expand rapidly into other markets including Singapore, Thailand, Indonesia, Vietnam, and Philippines. At around the same time Uber expanded into the region and became Grab’s main competitor until 2018. Dara Khosrowshashi, Uber’s new CEO, saw that the writing was on the wall and sold its Southeast Asian operations to Grab. At the time of sale Uber obtained a 27.5% stake in Grab (which is now 14%).

The bull case: a turning point

While the macro environment has turned into a more unforgiving one for loss-making tech firms, bulls would see today’s environment as being a positive turning point for the whole industry, and particularly so for incumbent leaders like Grab. If competitors and new entrants weren’t able to dethrone Grab in an era of easy money, it is less likely than ever that anybody is going to do so now. At the same time, the industry is beginning to show signs of rationalization as focus shifts to profitability, away from the past cycle norm of chasing growth at all costs. Having emerged victorious coming out of years of destructive competition, can Grab finally start to reap the fruits?

The Southeast Asian “homegrown” players, notably Grab and local Indonesian competitor Gojek (Gojek Tokopedia, or GoTo, after their merger in May 2021), have built their businesses around a dominant "super-app" strategy, which incorporates ride-hailing, deliveries, payments, and other consumer services.

“With features like cross-vertical batching, a driver partner can pick up someone’s kid, send him to school, after the school pick up food, coffee, do the grocery run (delivery)…the beauty is that the driver has the super-app on his/her side, he/she is working at very high throughout, very little dead time, where we don’t have to pay for incentives for that time”

- Anthony Tan

As the industry is forced to move away from the past model of excessive subsidies, the staying power of the super-app model may become more apparent given the advantages it has in user retention/acquisition (e.g. sending ride-hailing users to food delivery) and driver utilization. Particularly it remains to be seen how well pureplay platforms like Delivery Hero (Food Panda, the second largest deliveries player in the region) is able to fend off against Grab in the new landscape as promotional spending which they so heavily relied on will be tapered.

“Growing is not that hard as long as you raise a lot of venture money. Growing profitably and ultimately reaching a sustainable equilibrium in terms of unit economics in the long-term, that’s a lot harder. I would think Grab Food and Gojek are probably the only ones that really have a shot at that”

– Uber former Chief of Staff, APAC (Stream by AlphaSense)