A company sometimes struggles due to things that are out of its control. If you can tell the difference between a broken stock and a broken company, buying stock in an entity hit with temporary setbacks can reward a patient investor.
Southeast Asian tech company Grab Holdings (GRAB -0.54%) might fall into this category. In December, the super-app developer went public via a special purpose acquisition company (SPAC). In the month since its stock price has fallen more than 40%. Investors may be down on Grab right now, but there's an argument to be made that Grab could be a big winner in 2022.
Image source: Getty Images.
Grab is dominant in Southeast Asia
Grab is a super-app company in Southeast Asia; its Grab phone app provides a wide range of services its customers use daily. Users can access ride-hailing, food delivery, shipping, digital banking services, and more all from one app.
Grab's success depends on its firm footing in its essential services. Its three primary services are ride-hailing, food delivery, and digital payments, where its estimated market share in Southeast Asia is 72%, 50%, and 23%, respectively, and they are categories leaders in each. Southeast Asia includes Singapore, Malaysia, Thailand, and Indonesia, The Philippines, and Vietnam.
These core services are Grab's primary funnel, where it can begin to introduce additional products and services like insurance, investments, and more. Users can ride-hail to the store and pay for grocers with the Grab app; they might earn rewards that they can use to order dinner delivered that night.
The super-app wants users to visit it multiple times each day, giving it more opportunities for making money from those users. Network effects take over as Grab adds more services; the more things Grab does for its users, the less likely they are to leave the app.
Grab measures its growth with gross merchandise volume (GMV), the value of the transactions users make on the app. GMV has grown from $5.7 billion in 2018 to $12.2 billion the following year, more than doubling.
Pandemic challenges
COVID-19 came in early 2020, and it's had a significant impact on Grab's growth. In 2019, ride-hailing (mobility) made up $5.7 billion of Grab's $12.2 billion in total GMV, almost half. Lockdowns and pandemic safety measures have suppressed ride-hailing activity. In 2020, GMV dropped to $3.2 billion.
Grab's mobility business continued struggling in 2021. Its GMV was down 30% year over year in the third quarter, signaling that ride-hailing activity is still declining. Management had noted activity was rebounding late in the quarter as more people in the region were vaccinated.
Unfortunately, the recent outbreak of the omicron variant may have taken some steam out of any rebound for the mobility business. The region seems to be reacting aggressively to omicron, putting restrictions on travel once again.
Valuation is skewed
Grab's mobility struggles are offsetting the company's otherwise-strong growth. Total GMV was up 32% year over year in 2021 Q3, despite mobility being down 30%. Analysts might be beginning to reflect the ongoing mobility struggles into future growth estimates, turning market sentiment against the stock.
GRAB revenue estimates for next fiscal year. Data by YCharts.
Lower expectations for a company's growth would easily explain the market selling off the stock. Now that the SPAC merger is complete and Grab trades on its own, investors have pushed the stock below its $10 per share SPAC price, which served as a "floor" for the share price until Grab was formally public.
If we lower management's initial 2022 net revenue guidance of $3.3 billion to the above estimate of $1.1 billion, this significant drop-off would increase the price-to-sales ratio and probably cause the stock to fall, balancing out the reduced growth.
Investors need to decide whether these challenges are temporary or will impact Grab over the long term. Roughly half of the worldwide population is vaccinated after the vaccine came out roughly a year ago. Management's revenue guidance through 2023 averaged 42% growth per year, and nothing has changed about the company itself during the pandemic.
If the region continues vaccinating, mobility could rebound, and Grab may reaccelerate to its pre-pandemic growth rate. If the business does rebound enough to make management's original 2022 revenue guidance of $3.3 billion, the stock's current price might look cheap in hindsight. There is also the chance that 2022 is too soon and a rebound takes until 2023 or longer.
Nobody has a crystal ball, but investors who can take a patient approach to Grab and believe the pandemic will eventually stop suppressing travel in the region could do well over a multi-year period. Once Grab resumes its previously established pace of growth, sentiment could easily swing back to the positive, pushing the stock to new levels.
