Galeanu Mihai
Introduction
So far we’ve covered Grab (NASDAQ:GRAB) 7 times since 2021. Throughout our 7 theses, there was a common theme: “Grab’s Leadership Equated To Its Willingness To Spend”. Our verdict was that Grab had to keep spending cash on consumer and partner (drivers) incentives to grow adoption. Should other similar service providers offer better partner and consumer incentives, we expect partners and consumers to flock to the new service provider. For this reason, we viewed Grab to lack a business moat.
Even then, we continue to dollar-cost averaging into Grab below $4.30. Coincidently, Grab is been trading in a range below our $4.30 entry price (Figure 1).
Fortunately, there are now signs and observations that challenge this view such that this range may represent an accumulation phase. We’re excited to present them to you in this article.
Figure 1. Grab is in accumulation (Author)
The Importance of Grab’s Incentive Spending
The importance of GRAB’s incentive spending is manyfold. It is a proxy for customer and partner loyalty and business moat, but it also represents the barrier to profitability. For instance, if GRAB could completely do away with incentives spending ($391mil), GRAB can already turn a profit (from $250mil loss to $141mil profit). This could be the reason why Grab has been vocal about their commitment to tapering incentive spending since 2022.
Although it is logical to taper incentives in an unpredictable economic situation, we did not expect that Grab would taper at the rate it did to continue its growth trajectory and grow market share:
… we do not think that incentive expenditures will normalize nor will its mobility segment recover to pre-pandemic levels anytime soon.
Nevertheless, we are glad it did. Aside from cost-savings, Grab’s cost-saving policies also reveal several crucial hidden (and potentially bullish) insights.
1. Grab began to discover its moat
In Grab’s line of business, we define its business moat as the ability to grow revenue without additional spending on incentives. This ability implies that there is organic demand for Grab’s businesses and that Grab has certain attractiveness over competitors.
By referring to Table 1, it is observable that GMV (a proxy of usage of Grab’s services) remains relatively stagnant even though incentive spending was decreased. At the moment, Grabs showed that it can maintain demand for its services when the incentive was decreased by 30%.
This implies the discovery of a certain degree of moat and may signal the beginning of Grab’s journey to profitability.
Table 1. GRAB’s Historical Usage and Incentive Expenses
| QR | GMV | Total Incentive Expenses ($bn) |
| 2023Q1 | 5 | 0.391 |
| 2022Q4 | 5 | 0.412 |
| 2022Q3 | 5.08 | 0.476 |
| 2022Q2 | 5.06 | 0.523 |
| 2022Q1 | 4.8 | 0.560 |
Source: Author
2. Grab may have discovered inelastic demand
This finding is based on Grab’s ability to grow revenue without growth in usage (‘GMV’).
By referring to Table 2, we can see that total revenue grew even though GMV remained flat. In 2022Q2, the deliveries and mobility segments contributed 42% and 50% of Grab’s total revenue respectively. 3 quarters later, deliveries and mobility contributed 52% and 37% of Grab’s total revenue respectively. In other words, deliveries contributed 69% of Grab’s growth.
However, demand for deliveries (GMV of deliveries segment) remained relatively flat (only a slight decrease) while mobility GMV grew. Why is that? we think that it is the increased commission rate in the deliveries segment (Table 3).
Of course, there are consequences to raising the commission rate. We think that the drop in deliveries GMV is caused by increased commissions (there is a clear correlation between commissions and GMV). The increased commissions will likely increase the cost of merchant/delivery partners. These merchants then increase their prices to pass the cost onto the consumers. The higher food cost ultimately reduces demand. Grab attributed the slight decrease in Deliveries GMV due to holiday festivals but these festivals could’ve also driven growth. Furthermore, Deliveries GMV has been in decline in 4 straight quarters. Hence, we’ll beg to differ. Another piece of evidence is the growth from the mobility segment where GMV and revenue grew, Commissions were kept unchanged,
There are a few ways to interpret this. Some investors may say that this type of growth is unsustainable, which is true. But we could also say that there is relatively inelastic demand for its delivery services because the churn is less than the increase in commission rate. As a result, Grab can accrue more revenue per unit of value it provides to consumers and partners.
This is Business 101 where a business figures out the optimal pricing to reach maximum profitability. We think that Grab is in this stage of discovery where it has begun to figure out the point of inflection where an increase in commissions no longer increases revenue.
We’re unsure why Grab dropped the commission’s rate in 2023Q1, perhaps it might be related to these observations that it might not be beneficial to reveal to various stakeholders.
Nevertheless, the potential of having a moat and inelastic demand points to the right direction that Grab may have begun its path to profitability.
Table 2. Historical GMV and Revenuess
| QR | GMV ($bn) | Total Revenue ($mil) | Deliveries GMV ($mil) | Deliveries Revenue ($mil) | Mobility GMV ($mil) | Mobility Revenue ($mil) |
| 2023Q1 | 5 | 525 | 2,344 | 275 | 1,218 | 194 |
| 2022Q4 | 5 | 502 | 2,350 | 268 | 1,149 | 189 |
| 2022Q3 | 5.08 | 382 | 2,439 | 171 | 1,086 | 176 |
| 2022Q2 | 5.055 | 321 | 2,476 | 134 | 1,035 | 161 |
| 2022Q1 | 4.8 | 228 | 2,562 | 91 | 834 | 112 |
Table 3. Commission Rate Comparison
| QR | Deliveries Commission rate | Mobility Commission rate |
| 2023Q1 | Not disclosed | Not disclosed |
| 2022Q4 | 23.8% | 23.40% |
| 2022Q3 | 21.2% | 23.20% |
| 2022Q2 | 20.90% | 23.20% |
| 2022Q1 | 19.90% | 23.40% |
Source: Author
3. Obtaining Incentive Spending Efficiencies
We can’t overstate this particular insight.
Currently, Grab is aggressively adopting optimization and cost-cutting policies to improve profitability. The word “optimization” echoed throughout the entire 2023 Q1 earnings press release. We have also seen the results of Grab’s optimization efforts. Over the past year, net losses and adjusted EBITDA has seen major improvements (Table 4) over several consecutive quarters.
Table 4. Grab’s Historical Net Income and Adjusted EBITDA
| QR | Net Income | Adjusted EBITDA |
| 2023Q1 | -250 | -66 |
| 2022Q4 | -391 | 1. |
| 2022Q3 | -342 | -161 |
| 2022Q2 | -572 | -233 |
| 2022Q1 | -435 | -287 |
Source: Author
These improvements in profitability paint an optimistic outlook on Grab’s path to profitability, but more importantly, a clear path towards profitability.
If Grab can cut 2023 Q1 incentive spending by another 60% (or $250mil) without adversely impacting GMV and revenue, Grab can certainly break even and reach profitability.
The problem is that this is not sufficient to justify Grab’s current $14.5bn market cap.
If Grab can completely do away with its incentive spending without any decline in GMV and revenue, Grab only has a net income of $140mil quarterly or $560mil annually. At this level of profitability, it is difficult to justify its $14.5bn (or 26x earnings) with no growth. Based on our knowledge, the average PE of a profitable business without growth prospects is about 10x-15x tops. Under these assumptions, Grab would still be overvalued by at least 60%. Nevertheless, it’s still encouraging to be able to see a clear path to profitability through optimization.
In short, Grab cannot completely rely on cost-cutting and optimization policies and still has to grow to justify its valuations. Fortunately, this department is rather optimistic as well.
By referring to Table 5, we can see that Grab’s revenue and usage per dollar spent on incentives have improved. In 2022 Q1, incentive spending is 2.46x revenue. But in 2023 Q1, incentive spending is 74% of revenue.
Table 5. Grab’s Performance Improvements Per Dollar Spent on Incentives
| QR | GMV ($bn) | Total Revenue ($mil) | Incentive Spending (IS, $mil) | IS/GMV | IS/Revenue |
| 2023Q1 | 5 | 525 | 391 | 74% | 8% |
| 2022Q4 | 5 | 502 | 412 | 82% | 8% |
| 2022Q3 | 5.08 | 382 | 476 | 125% | 9% |
| 2022Q2 | 5.055 | 321 | 523 | 163% | 10% |
| 2022Q1 | 4.8 | 228 | 560 | 246% | 12% |
Author
Following this trajectory, investors might expect revenue per dollar spent on incentives to continue to improve and eventually reach profitability. It’s possible, but we cannot expect revenue and usage per dollar spent on incentives to grow indefinitely.
In other words, there is a limit to how much revenue and usage Grab can accrue per dollar spent on incentives. We hypothesize that the relationship between revenue and incentive spending has a similar distribution to logistics distribution (show figure and point to the peak).
Currently, we’re unable to model Grab’s relationship between revenue and incentive spending. But it seems that the revenue (or GMV) that Grab can accrue per dollar spent on incentives is much higher than what we thought. This is because revenue and GMV remain stagnant even though incentives have been cut by 30%. That’s rather optimistic if you ask us.
Nevertheless, Grab is in the process of discovering its incentive spending efficiencies as well. So we’ll revisit this aspect as more data is made available to us,
Final Remarks
Overall, we maintain the buy rating that Grab is a buy for us below $4.30. Not only Grab might be in an accumulation stage, Grab is also starting to show some degree of the moat, inelastic demand, and incentive spending efficiencies. We think that these 3 fundamental drivers will go a long way for Grab’s long-term growth.
