Back in 2018, Uber Technologies (UBER 2.82%) sold its Southeast Asian business to Grab Holdings (GRAB 5.08%), a start-up that bundled various transportation, food delivery, and payment services together into a single "super app." In exchange, Uber received a 27.5% stake in Grab.
Grab subsequently conquered about three-quarters of Southeast Asia's ride-hailing market, according to Blackbox Research, and it went public last December by merging with a special purpose acquisition company (SPAC). Grab's stock opened at $13.06 on its first trading day, but it now trades at less than $3 a share. It quickly lost its luster as investors fretted over its slowing growth, ongoing losses, and high valuations.
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Uber also struggled this year as soaring fuel costs and other inflationary headwinds overshadowed its post-pandemic recovery. Investors largely overlooked its improving profits, which rose as it divested its overseas businesses and the unprofitable ATG (advanced technologies group) that was developing driverless cars and drones. As a result, Uber's stock lost more than a third of its value this year.
Rising interest rates exacerbated the pain for both stocks as investors rotated toward more conservative investments. But should investors take a contrarian view on either of these growing digital platforms?
Uber: Stabilizing growth and rising profits
Uber's revenue declined 14% to $11.1 billion in 2020 as the pandemic throttled the growth of its ride-hailing business. Uber Eats grew as more people stayed at home, but it couldn't offset its 27% decline in total trips. It posted an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of $2.5 billion. But in 2021, Uber's revenue surged 57% to $17.5 billion as the pandemic-related headwinds passed, and its total trips rose 27%. Its adjusted EBITDA loss also narrowed to $774 million as it benefited from the money-saving divestments of its overseas and ATG units.
In the first half of 2022, Uber's revenue surged 118% year over year to $14.9 billion, with a positive adjusted EBITDA of $532 million. Its quarterly free cash flow also turned positive for the first time in the second quarter. It served 122 million monthly active platform consumers (MAPCs) at the end of the quarter, which represented a 21% growth from a year earlier.
For the full year, analysts expect its revenue to rise 79% to $31.3 billion as its adjusted EBITDA climbs to $1.5 billion. Based on those expectations, Uber's stock trades at less than two times this year's sales and 36 times its adjusted EBITDA. Those valuations look cheap, but concerns about volatile fuel costs, regulatory challenges (especially demands to reclassify drivers from independent contractors to employees), a potential slowdown during a recession, and a recent data breach all seem to be driving the bulls away.
Grab: A near-term slowdown, a long-term recovery
Grab's revenue rose 44% to $675 million in 2021 as the gross merchandise volume (GMV) across all its services increased 29% to $16.1 billion. It ended the year with 24.1 million average monthly transacting users (MTUs), but that represented a 3% decline from 2020. Its adjusted EBITDA loss also widened from $780 million to $842 million.
In the first half of 2022, Grab's revenue grew 39% year over year to $549 million, but its adjusted EBITDA loss widened from $325 million to $520 milion. Grab remains a lot less profitable than Uber because it's still trying to grow its market share by offering a lot of loss-leading incentives to its partners and consumers. On the bright side, its MTUs rose 12% year over year to 32.6 million in the second quarter -- and 62% of those users now use at least two of its services.
For the full year, Grab expects its revenue to grow 45%-55% in constant currency terms, which was far below analysts' expectations for 89% growth. It's gradually reining in its expenses, but it still expects its full-year adjusted EBITDA loss to widen to $900 million -- compared to analysts' expectations for a wider adjusted EBITDA loss of $945 million. Grab expects to break even on an adjusted EBITDA basis by the second half of 2024. Based on those latest estimates, Grab's stock trades at 10 times this year's sales. Therefore, Grab still looks a lot pricier -- and riskier -- than Uber.
The clear winner: Uber
Uber won't turn profitable on a GAAP (generally accepted accounting principles) basis anytime soon -- partly due to its stakes in unprofitable companies like Grab -- but it's been taking steps in the right direction by trimming the fat and streamlining its business. Grab will continue to grow, but it will remain unprofitable on an adjusted EBITDA basis for at least two more years. Therefore, Uber is clearly a better buy than Grab in this grueling market for growth stocks.
