Special purpose acquisition companies have rapidly become a popular way for businesses to go public -- there have been more than 350 SPAC mergers so far in 2021 alone. And recently, Altimeter Growth (AGC) agreed to take Southeast Asia's "super-app" company, Grab, public in a merger worth close to $40 billion, making it one of the largest SPAC deals yet.
Despite the size of that deal, Grab has largely been flying under the radar on Wall Street. Here is why investors should consider grabbing shares for their long-term portfolios.
Thriving in a digital economy
Singapore-based Grab serves the Southeast Asia market with a super-app that offers its users a wide variety of services, including:
- Food delivery
- Grocery delivery
- On-demand parcel shipping/delivery
- Digital banking
In essence, Grab is like Uber, Doordash, FedEx, and Square merged into a single app.
The Southeast Asia region it serves has a population of 670 million people, roughly twice that of the United States, and its demographics skew young and technologically adept: 50% of those people are under 30, and 68% of households have at least one smartphone. Each day, the average resident spends eight hours on the internet, more than 60 minutes higher than the global average.
Grab is rapidly growing, and network effects are kicking in
Grab has aggressively grown and gained market share for its services, including 50% of online food delivery, 72% of ride-hailing, and 23% of e-wallet services in Southeast Asia. Uber, the dominant ride-hailing company in the U.S., tried to compete in Singapore, but gave up and sold its Singapore business to Grab in 2018.
The company has steadily added new services and offerings over several years, and just got its digital banking license in Singapore in 2020. To encourage its users to turn to the app more often, it has a rewards system that gives them points for activity, which can be redeemed across the app for discounts, etc.
The growing number of people making use of Grab is creating a powerful network effect, attracting more service providers and making the app more useful, which in turn attracts new users, and makes it a harder app to give up. And the platform is growing rapidly. In 2017, the total value of transactions on Grab was less than $1 billion -- by 2020, it had grown more than 10-fold to $12.5 billion.
Revenue, meanwhile, has increased at an annualized rate of 133% since Q1 2018. In the company's most recently reported quarter, Q1 2021, revenue grew 39% year over year to $503 million, despite the continued pandemic headwinds on ride-hailing services.
The company isn't profitable yet -- it posted an EBITDA loss of $111 million in Q1. But that was a dramatic improvement from Q1 2020, when it lost $344 million. As Grab grows larger and revenue gains outpace rising costs, it should become profitable.
Attractive despite its valuation
Grab's SPAC merger with Altimeter Growth will value it at a market cap of around $40 billion. This is based on the original $10 share price of Altimeter stock, which it is trading near today.
The company is projecting 2021 revenue of $2.3 billion, which would give the stock a price-to-sales ratio of 17. That isn't cheap, but the structure of SPACs puts something of a floor on the stock price at $10 until the merger is completed. In other words, Altimeter's shares can't get much cheaper than they are now.
Could the stock fall after the merger closes? Yes, but Grab is growing at a blistering pace, and could easily grow into its current valuation.
A SPAC that might be worth grabbing
Grab is a digital company that is expanding within a digitally inclined market. As it continues to expand its portfolio of services and products, and weave them around its customers' daily activities, it will be an exciting company to watch over the long term.
Don't be fooled by its already-large market cap; Grab has a long runway for growth ahead, which could spell solid returns for investors.