To The Moon

Summary

• Every release of quarterly reports becomes so ever important as the date for Grab's merger draws near.

• Grab's Q2 earnings suggested that Grab's market is nearing maturing, where a considerable increase in incentives only drove marginal growth.

• Q3 earnings invalidated this hypothesis because GMV and GMV per user grew even though incentives declined.

• Q3 earnings provided vital evidence showing Grab's 28% decline in revenue in 2021 sterns from underperformance in the mobility segment due to COVID19 spikes/lockdowns in SEA countries.

• Grab's current $52bn valuation, removal of $10 NAV floor, and inflationary and probable taper/rate hikes economic environment makes it difficult to invest in Grab.

Chadchai Krisadapong/iStock via Getty Images

Introduction

We're finally going to get a date for the highly anticipated Grab (NASDAQ:GRAB)-Altimeter (AGC) merger. Nov. 30 will be the date for holders to vote on the merger. This merger is inevitable as Grab wascontracted to go public before 2023 or risk a $2bn settlement with Uber (UBER).

The AGC's share price has also reacted positively to the anticipation as AGC is now 30% higher than its $10 NAV. This essentially values Grab at about $52bn. Grab's Q3 earnings report may very well be the very last report going into the merger. The importance of Grab's Q3 earnings cannot be overstated as Grab's Q2 earnings were not as optimistic as we've hoped for.

Therefore, this article aims to dissect Grab's Q3 earnings report and provide an update to ourprevious investment thesis.

A Short Recap on Grab's Q2 Performance

Grab's earnings report puts a lot of emphasis on Adjusted Net Sales where Adjusted Net Sales = Revenue + consumer incentives and excess driver/merchant incentives. This will mislead investors and exaggerate the company's actual performance. Firstly, incentives-fueled growth is not sustainable due to cash burns and reliance on subsidies from external parties. Secondly,according to Grab:

Grab presents Adjusted Net Sales as a metric to compare, and to enable investors to compare, its aggregate operating results in the absence of excess incentives, which are intended to be temporary drivers of growth, and which Grab plans to reduce in the future. Grab’s management believes Adjusted Net Sales captures significant trends in its business over time.

Therefore, incentives should be removed from any form of Grab's performance analysis. Unfortunately, Grab's performance after removing incentives doesn't look optimistic. Grab's revenue decreased by 16% quarter over quarter, despite an increase in adjusted net sales of 8%. This suggests that incentives fueled the bulk of its expansion. According to the numbers, Grab upped its incentives by 27% quarter over quarter. However, the 27 percent increase in incentives resulted in just a 3.78 percent rise in monthly transacting users (MTU) and a 2.6 percent increase in GMV per MTU. This has several consequences. To begin, the considerable increase of incentives but just a modest increase in growth indicates an aging market.

On the other hand, with Uber as comps, Grab's valuation of $60bn implies a (revised) CAGR of 35% + a full recovery of its ride-hailing business to pre-pandemic levels. This causes a discrepancy between its valuation and growth expectations. A bear-case scenario will see Grab's share price mirror Zoom's (ZM) decline afterreporting slowing growth.

Let's examine whether Q3 performance can turn things around for Grab.

Figure 1: Grab's 2021Q1 Quarterly Performance

Figure 2: Grab's 2021Q2 Quarterly Performance

Source:Grab

Grab's Q3 Performance Breakdown

Grab's Q3 adjusted net sales stand at $429mn, 22% decline QoQ. Grab's Q3 revenue also declined 13% QoQ. This implies incentives to consumers declined 27% QoQ. It is a comfort to see that revenue is less sensitive to consumer incentives. A more worrying sign would be increasing adjusted net sales (or incentives) and declining revenue. Since incentives to consumers declined more than revenue, there isn't evidence suggesting an anomaly or discrepancy. Rather, the decline is more likely to stern from the business environment, which is what Grab has reminded investors about in Q2.

In Q2, Grabwarned investors about potential severe COVID19-related mobility restrictions in Southeast Asia. During the period, Grab's full-year 2021 projection has considered the potential of partial and total lockdowns in various countries where the company operates as a consequence of COVID19's continued expansion. Grab's fear came true as COVID cases in SEA countries reached a new all-time high in Q3 (Figure 3) due to the Delta variant. The Philippinesreimposed lockdowns on Sept. 9, a day after announcing the lifting of stay-at-home orders for more than 13mn people. In August, Vietnam has also imposed a strict stay-at-home order in Ho Chi Minh City's southern suburbs and dispatched the army to assist quarantined citizens.

Therefore, it is no surprise that Grab attributed the decline in overall revenue to the lockdown, especially inVietnam. This claim is accurate. By referring to Table 1, we can see that the decrease in revenue is mainly derived from its mobility segment. If we expand our analysis time period, we can observe (Table 1) that Grab's underperformance (drop in revenue) in 2021 is caused mainly by its mobility segment. Grab's Q2 mobility segment revenue, and total revenue dropped $27mn and $35mn QoQ, respectively. Grab's Q3 mobility segment revenue and total dropped $30mn and $23mn QoQ, respectively. The decline in the mobility segment coincides with increases in COVID19 cases across SEA (Figure 4). Therefore, Grab's claim that its decline in revenue is contributed by the lockdowns and travel restrictions across SEA.

Despite the drop in revenue, activities (GMV) on the company's platform actually increased 5% during the period. This may not seem like a big deal, but this statistic actually invalidated one of our previous hypotheses (maturing market). In Q2, Grab's GMV only increased 6.5% in spite of a 27% increase in incentives. This suggested that Grab's market is reaching maturity. However, Grab's GMV increased 4.1% (QoQ) in spite of a 27% (QoQ) decline in Q3. This means that Grab's GMV growth isn't fueled by incentives as much as initially thought.

Following Grab's narrative, monthly transacting users (MTU) also declined due to lockdowns. This is also expected. However, what was unexpected is GMV per MTU actually increased. This further proves that Grab indeed has a network effect where activities (GMV) of existing users increase. This is crucial to Grab's overall growth for several reasons:

1. It is unlikely for Grab to expand beyond SEA. This is because Grab, Uber, and DiDi (DIDI) share equity with one another. Therefore, it is unlikely for them to compete with one another.

2. Due to the limited geographical expansion, it is clear that Grab has to upsell and cross-sell new products to the existing userbase to increase the revenue stream.

For these very reasons, Grab's increase in GMV and GMV per MTU is a positive takeaway. With UBER as comps, Grab has to grow at35% CAGR on top of afully recovered pre-pandemic mobility segment over the next five years. This feat is very challenging. Firstly, the majority of Grab's revenue is derived from its mobility segment. Based on the relationship between COVID19 cases and Grab's mobility segment (Figure 4 and Table 1), we expect Grab's Q4 mobility segment to be in between Q1's and Q2's, somewhere around $135mn. This figure only represents around 6.75% of the pre-pandemic level (approximately$2bn). Hence, there is still a very long way to go. Secondly, we don't expect food delivery to grow materially from here as we expect the need for food delivery to decrease when the economy reopens. Hence, food delivery is not expected to contribute to Grab's overall growth. Thirdly, financial service and enterprise & new initiatives' overall contribution to revenue is only marginal. Hence, it is difficult to justify Grab at its current $52bn valuation.

Moreover, investors will lose the $10 NAV safety net once the Grab-AGC merger is completed. This adds to investors' downside risks. In addition, the overall macroeconomy conditions add to the difficulty in investing in high-growth companies. High inflation erodes the value of future earnings, while any form of tapering or rate hikes will devalue Grab's intrinsic value.

Figure 3: Grab's 2021Q3 Quarterly Performance

Source:Grab

Figure 4: COVID19 Cases in SEA Countries

Source: Google

Table 1: Historical Revenue breakdown in $mn

DeliveryMobilityFinancial ServiceEnterprise and New InitiativesTotalQ153 (25%)145 (67%)8 (4%)10 (5%)216 (100%)Q245 (25%)118 (65%)6 (3%)11 (6%)180 (100%)Q349 (31%)88 (56%)14 (9%)7 (4%)157 (100%)

Source: Grab andAuthor

Final Remarks

Every release of quarterly reports becomes so ever important as the date for Grab's merger draws near. Grab's Q2 earnings suggested that Grab's market is nearing maturing. During the period, a considerable increase in incentives only drove marginal growth. However, Q3 earnings invalidated this hypothesis because GMV and GMV per user grew even though incentives declined. Q3 provided a vital data point that showed Grab's decline in revenue from Q1 to Q3 coincides with spikes in COVID19 cases across SEA. The spikes in COVID19 cases led to a series of lockdowns and restrictions in SEA countries. As a result, Grab's mobility segment suffered. Since at least 55% of Grab's revenue in 2021 was derived from its mobility segment, Grab's overall performance (total revenue) had also suffered.

​​

We expected Grab's mobility segment to recover to figures between Q1 and Q2, given that COVID19 cases are stabilizing in SEA. However, this minor recovery isn't enough to justify its current $52bn valuation, where its valuation implies an expectation of 35% CAGR on top of a fully recovered pre-pandemic mobility segment over the five years. On top of that, the removal of the $10 NAV floor post-merger and the high inflationary and high risk of tapering/rate hikes economic environment adds to investors' downside risk. Therefore, we chose the conservative alternative to take profits at this price level and only leave profits on the table to capture potential spike on announcements related to its merger.$Grab Holdings(GRAB)$