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Specialized acquisition firms have quickly become a popular way for companies to go public – there have been more than 350 SPAC mergers to date in 2021 alone. And recently, Altimeter Growth (NASDAQ: AGC) agreed to bring Southeast Asian “super-app” company Grab to public in a nearly $ 40 billion merger, making it one of the largest SPAC deals to date.
Despite the size of this deal, Grab on Wall Street has largely flown under the radar. For this reason, investors should consider adding stocks to their long-term portfolios.
Successful in a digital economy
Singapore-based Grab serves the Southeast Asian market with a super app that offers its users a variety of services including:
- Ride hailing
- Grocery delivery service
- Grocery delivery
- Parcel shipping / delivery on demand
- Digital banking
In essence, grave is like Above, Door slam, FedEx, and square merged into a single app.
The Southeast Asia region it serves has a population of 670 million people, roughly twice that of the United States, and the demographics are young and tech-savvy: 50% of those people are under 30 and 68% of households have at least one smartphone. Every day, the average resident spends eight hours on the Internet, more than 60 minutes more than the global average.
Grab is growing rapidly and network effects are kicking in
Grab has grown aggressively and gained market share for its services including 50% of online food delivery, 72% of ridesharing and 23% of e-wallet services in Southeast Asia. Uber, the dominant ride hailing company in the US, tried to compete in Singapore but gave up and sold its Singapore business to Grab in 2018.
The company has been adding new services and offerings continuously over several years and didn’t get its digital banking license in Singapore until 2020. To encourage its users to use the app more often, it has a reward system that gives them points for activities that can be redeemed in the app for discounts, etc.
The growing number of users of Grab creates a strong network effect, attracts more service providers and makes the app more useful, which in turn attracts new users and makes it more difficult to abandon the app. And the platform is growing rapidly. In 2017, the total value of transactions on Grab was less than $ 1 billion – by 2020 it was more than ten-fold to $ 12.5 billion.
Revenue has grown at an annualized rate of 133% since the first quarter of 2018. In the company’s most recently reported quarter, Q1 2021, revenue rose 39% year over year to $ 503 million despite the ongoing pandemic headwinds in driving services.
The company is not yet profitable – it posted an EBITDA loss of $ 111 million in the first quarter. But that was a dramatic improvement over Q1 2020 when it lost $ 344 million. As the Grab gets bigger and the increases in sales outweigh the increasing costs, it should become profitable.
Attractive despite the rating
Grab’s SPAC merger with Altimeter Growth will value it with a market cap of approximately $ 40 billion. This is based on the Altimeter stock’s original price of $ 10, which is trading nearby today.
The company forecasts sales of $ 2.3 billion in 2021, which would give the stock a price-to-sales ratio of 17 completed. In other words, Altimeter’s stock can’t get much cheaper than it does now.
Could the stock fall after the merger completes? Yes, but Grab is growing rapidly and could easily grow into its current rating.
A SPAC that might be worth grabbing
Grab is a digital company expanding in a digitally driven market. As it continues to expand its portfolio of services and products and links it to the daily activities of its customers, it will be an exciting company in the long term.
Don’t let its already high market cap fool you; Grab has a long runway ahead of it for growth, which could mean solid returns for investors.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.