Grab’s profitability push enthralls analysts, but befuddled investors aren’t biting

GRAB’S latest FY2022 results paint quite a positive picture: Losses narrowed by more than half, and the target date for adjusted earnings before interest, depreciation and amortisation (Ebitda) breakeven was brought forward by six months to Q4 FY2023.

Following the results announcement, analysts have been gushing about the stock, and recommending “buy” orders on the back of fundamentals that seem to be on the up and up.

Based on Bloomberg data, 19 out of 26 analysts surveyed have “buy” recommendations on Grab.

After the release of the results, buoyed by the efforts of Grab management to reach profitability, another analyst upgraded the counter to “hold” from “sell”.

But the market seems to be moving in the opposite direction.

Despite Grab’s guidance for its FY2023 revenue to hit between US$2.2 billion and US$2.3 billion, its share price tumbled as much as 11.5 per cent from US$3.58 last Thursday (Feb 23) morning to US$3.17, before recovering to close at US$3.20. The stock fell further to US$3.12 on Friday.

The disconnect between analyst and market sentiments is perhaps not surprising.

For one, it could be hard for retail investors to stomach some analysts’ exuberance over Grab’s prospects.

In the post-results reports, the analysts were all upbeat on Grab’s cost-cutting efforts and move to bring forward the adjusted Ebitda breakeven date.

One had a target price of US$6 for Grab, despite the fact that the company’s share price had not broken past US$4 in the last six months.

By speaking to and asking questions of Grab’s senior management directly, the analysts could have gained some insights that investors are unable to access freely.

But one key reason for the disconnect could boil down to this: The market does not view achieving breakeven on an adjusted Ebitda basis as being equal to actually turning profitable in the usual financial sense.

For example, Grab’s adjusted Ebitda metric does not take into account certain costs, including stock-based compensation expenses.

It also doesn’t help that the metrics used by companies like Grab aren’t exactly comparable to those of its peers.

A recent report by venture builder Momentum Works highlighted the fact that the way Grab and its regional competitor, GoTo, measure revenue contributions are different.

Grab, for instance, deducts the value of incentives from its gross revenue to get net revenue, which could be negative.

GoTo, on the other hand, deducts incentives but does not report net revenue as negative. Instead, it reports net revenue as zero, and deducts the rest of the expenses outside of the net revenue column.

In these times of macroeconomic uncertainty, it seems that investors aren’t willing to decipher the alphabet soup of financial metrics that Grab is throwing at them.

While Grab has presented these metrics as being more representative of its operations, investors are perhaps looking for more concrete numbers that they could put their money behind.

GoTo faces similar challenges. The other superapp company recently held a media briefing to drive home the point that it is ramping up its efforts to turn profitable, and bringing forward its profitability targets by a year.

Like Grab, GoTo has been struggling with a slump in its share price, which fell to a new low after a lockup expiry in November. GoTo has yet to release its FY2022 results.

Another barrier that Grab faces in appealing to investors could be the market in which it is listed.

Investors in the US are likely to draw parallels with their own situation, where the rising costs of living have given them pause in deciding on taking a ride or ordering food delivery versus buying necessities.

While South-east Asia is not immune to rising interest rates and macroeconomic uncertainty, the economies here appear to be more resilient for now, which explains Grab’s improved FY2022 performance.

Historical performance, however, is no guarantee of future success. And South-east Asia will also be put to the test of rising inflation and interest rates.

But until Grab can sell its story to investors as well as it does to analysts, the sentiment of the market may remain the polar opposite of that of analysts.