Why did Grab’s share price plunge despite the “strong” results and should you buy the dip?

TL;DR

• On the headline level, Grab’s 2Q22 results looked good with a lower net loss. However, its share price fell 12% after the results were released on 25 August.
• This might be because Grab lowered its gross merchandise value (GMV) guidance with a slowdown in Deliveries.
• Investor expectations might also be high as Grab’s share price has bounced by close to 60% from its lows. 
• We’d be staying away until it can demonstrate a sharper reduction in losses and a clearer path to profitability. 

What happened?

We received several questions about Grab’s share price movement after its most recent 2Q22 results.

On the headline level, things seem to look pretty good:

• Grab reported 2Q22 revenue of US$321 million, an increase of 79% year-over-year. 
• Its adjusted EBITDA losses fell from US$ 287 million in 1Q22 to US$233 million in 2Q22. 
• Its net loss narrowed to US$572 million in 2Q22, compared to US$801 million in 2Q21.
• Total incentives as a proportion of its gross merchandise value (GMV) came down to 10.3% in 2Q22 from 11.6% in 1Q22. 
• With the tapering of incentives, Grab has accelerated on its expected breakeven timelines for its core food deliveries and overall deliveries by two quarters. 
• Food deliveries is now expected to breakeven in the first quarter of 2023, while the overall deliveries business is expected to breakeven in the second quarter of 2023. 

From the headlines, it would seem like Grab is accelerating on its path to profitability. During the earnings call, many analysts congratulated Grab on its “strong” results. 

However, the stock fell by 12% after the results on 25 August.

If things look so good, why did the stock react in such a way? And is the dip a buying opportunity? 

What might have led to the fall ins share price?

#1 - Grab lowered its gross merchandise value (GMV) forecast due to weakness in deliveries

Investors were probably disappointed that Grab lowered its GMV estimates to 21-25% growth year-on-year, compared to its previous guidance of 30-35%. 

This would mean GMV of $19.5-20.1 billion this year, compared to its previous estimate of $20.9-21.7 billion. That’s close to a $1.5 billion difference!

One of the reasons for the lower GMV guidance is due to a moderation in deliveries demand as more people dine-out. 

In particular, Grab mentioned that delivery growth rates have started to moderate towards the second half of the second quarter. 

This led to deliveries GMV in 2Q22 coming in below its previous guidance. 

Grab has also been impacted by currency movements, and it estimates that GMV growth would be 25-29% year-on-year assuming that currency rates do not change. 

Lastly, Grab claims that it will be focusing on increasing high-quality GMV transactions, which will lead to slower GMV growth. 

#2 - Slowing GMV growth + high fixed cost = harder to turn profitable 

With all the focus on trying to move towards profitability, many investors would have thought that Grab would have been able to lower its costs more significantly. 

The company has taken action to exit some lines of business that it believes do not lead to long term and sustainable growth.

Some of these initiatives Grab include:

• Closing its dark stores operations in Singapore, Vietnam and the Philippines (Dark stores are small fulfilment centres that can help to reduce delivery times) 
• Closing its GrabWheels operations in Singapore and Malaysia

However, its regional corporate costs remain high at US$214 million in 2Q22, above what it was in the previous quarter. 

This represented about 4.2% of its GMV in the quarter. 

What this means is that it will have to work a lot harder to reduce its variable costs to be able to turn profitable over the next few years, especially as the pace of its GMV growth slows down. 

This might be difficult to achieve especially as it will be launching the GXS digital bank in Singapore in the fourth quarter of this year. 

This will be followed closely by the launch of the digital bank in Malaysia and Indonesia. 

#3 - Expectations were high going into results

What we think led to the sharp fall in Grab’s share price, was that earnings expectations were quite high going into the results.

After all, Grab’s share price has rebounded from a low of $2.26 in May to above $3.60 before the results were announced. That’s close to a 60% bounce in 6 months.

Apart from the recovery in tech stocks, more brokers have also turned positive on Grab in recent months. 

CGS-CIMB initiated on Grab with a “add” rating and target price of $3.60 on 1 August. The brokerage believes Grab is at an “inflexion point” with strong margin improvement potential starting in 2Q as competition for the company appears to be easing. 

JP Morgan upgraded Grab to Overweight on 18 July as it expected “meaningful earnings surprises to be eminently possible” given the faster push towards profitable growth.  

However, it would seem like Grab was not able to meet such heightened expectations. Following the results, JP Morgan raised its adjusted EBITDA loss expectation in 2022 to $917 million in 2022 from $866 million previously.

With all the focus on moving towards profitability, what investors might have disliked is that the expected losses are now greater than what they were before the results. 

What does this mean?

#1 – Investors should be aware of earnings expectations

What we have learnt from Grab’s results, is that investing is often about expectations.

A company may report “strong” results, but its share price may still fall when such “strong” results come in below expectations. 

What this means is that we should always try to understand what expectations are before investing in a stock. 

If the share price has gone up quite a bit as Grab did before the results, it might also mean that expectations for the company are more elevated

#2 – Grab needs to show a clearer path to profitability

Which comes to the question you’d probably have – would we buy Grab after its post-results correction?

Just like what we shared for Sea Limited, Grab will continue to face challenges in the next few quarters. 

While its peers in the US such as Uber have already been able to turn cash flow positive, Grab’s losses are still fairly significant.

Despite efforts to lower incentives and cut costs, it has not been able to narrow its losses to investors’ expectations with the high regional costs and investments in new businesses such as its digital bank. 

We’d be staying away until it can demonstrate a sharper reduction in losses and a clearer path to profitability.