Companies coming public through mergers with special purpose acquisition companies (SPACs) became quite trendy in early 2021, but interest (and investments) in them fizzled quite a bit in the latter half of the year. Over 600 of these "blank-check companies" were launched in 2021, and many of them did find companies to merge with. Unfortunately, many ended up merging with low-quality companies that resulted in bad or mediocre stock performance. It seems that finding high-quality SPACs is no less tricky than finding high-quality stocks in general.
Grab Holdings (GRAB -5.63%) came public through a SPAC in early December, after the SPAC craze had run its course. The stock got hammered almost immediately, and it is now trading over 30% off the price at which it came public. Does this dip provide a good buying opportunity, or should you simply stay away from Grab? Let's find out.
What is Grab and what is its potential?
Grab Holdings is a Singapore-based company whose main product is trying to become the super app of Southeast Asia. The company, through the Grab app, primarily offers delivery and ride-hailing services across the region, and it is the leading platform in Southeast Asia for those services. The app had over 22 million monthly active users in Q3 2021, making it a go-to app for food and grocery delivery and ride-hailing services.
The company also has a smaller offering in the financial services space. The app offers a mobile wallet with multiple popular features, including buy-now, pay-later services. With these, Grab is making it easy for Southeast Asian consumers to manage every part of their daily lives right from its mobile app.
Southeast Asia is home to over 660 million people, and this region is one of the fastest-growing economic regions in the world. The total GDP for the area is expected to grow at a compound annual growth rate (CAGR) of 7.4% until 2025, comparable to China's CAGR of 7.1% and much higher than the United States' CAGR of 4.6%. Grab management estimates its total addressable market for the app will be over $180 billion by 2025.
Grab is also seeing its active users engage more with the platform. In the third quarter, Grab's gross merchandise per user increased 43% year over year to $183. If the company wants to be a super app that its users engage with constantly, it must see high engagement, so this is a great sign.
Grab needs to make some major adjustments
While the app has a massive potential market to service, and the app's services look strong, the company's financials tell a different story. In the first six months of 2021, the company brought in $396 million in revenue, but its costs amounted to $507 million.
Just in Q3 2021, Grab's net losses reached $988 million, compared to just $157 million in revenue. What's worse is that the net loss is widening. In Q3 it grew 59% year over year while revenue fell 9%. Typically, investors want to see revenue increasing while net loss is falling. The company is managing these losses using the $4.3 billion in cash it raised from the SPAC, but with nearly $1 billion in quarterly net losses, that cash won't last long.
While the company is the leading provider of its services in Southeast Asia, there is no lack of competition. One behemoth -- Sea Limited (SE 1.24%) -- battles with Grab on the financial services front. In Q3, Grab's total payment volume (TPV) was $3.1 billion, which is strong, but it is just two-thirds of Sea's $4.6 billion in TPV. Grab also faces stiff competition from another super-app behemoth: GoTo Group (created in 2021 by a merger of Gojek and Tokopedia). GoTo Group competes directly in every market Grab is in, making it a fierce competitor.
Losses are understandable in a young company focused more on expansion than on profits, and it probably came public when it did to fund its expansion. But it's concerning that the company has negative gross margins despite having mature business segments, and the financial picture for the company, in general, is worrisome.
Is Grab stock a buy?
Grab's business model raises some concerns. While I love its financial services segment, the economics of food delivery and ridesharing are uncertain. U.S. businesses that operate in similar spaces, like Uber Technologies (UBER 1.04%), have struggled to become profitable because of the poor margins in the industry. This concern about this segment of its operations alone is enough to keep me from investing. When you add in that the stock is valued at over 30 times sales, even after its rapid price drop, it would seem that the stock is still trading at a premium I'm not willing to pay.
Given an uneasy business model, poor financials, strong competition, and a high valuation, it is safe to say that Grab will stay far away from my portfolio for now. Companies that operate in this region have so much potential, but there are too many worries for me to seriously consider Grab Holdings. Its business model needs adjusting.