Uber’s first Gaap profit suggests Grab has long road to profitability

WHAT can Uber, the trailblazing ride-hailing platform that achieved generally accepted accounting principles (Gaap) operating profit for the first time last week, tell us about the road ahead for Grab?

If Uber’s path serves as a guide, Grab may achieve a quarterly operating profit sometime only in 2025 – or later.

Gaap is the accounting standard used in the United States. Gaap profit is more difficult to achieve than the preferred metric of many technology companies: positive earnings before interest, taxes, depreciation and amortisation (Ebitda).

The latter does not account for expenses such as stock-based compensation, and depreciation and amortisation. Yet, these are real costs to running a company.

Many of these items are non-cash expenses; but they still matter to the valuation of a company, which comes down to the free cash flow per share. At some point, depreciating assets need to be replaced – which will increase cash outflows and reduce free cash flow.

Similarly, stock-based compensation may not have an immediate cash impact. However, by increasing the share count of a company, it reduces the amount of free cash flow that accrues to each share in the company.

Comparing the two tech players can give us an idea of how much longer it will take for Grab to achieve profitability. Uber announced that it hit the milestone in its second-quarter results for 2023.

While it is difficult to draw firm conclusions because of differences in both businesses, which include the geographies where they operate and how they report their financials, Uber’s path to profitability sheds light on what Grab’s might look like.

Grab – which purchased Uber’s South-east Asia business in 2018 – is expected to report its numbers for Q2 2023 in August.

Not apples to apples

Drawing contrasts between Uber and Grab on the basis of their reported numbers is not straightforward. Both companies determine many metrics differently, from gross merchandise value (GMV) – or what Uber terms “gross bookings” – to revenue and Ebitda.

The differences in how incentives are calculated – whether they reduce revenues or are recorded as part of sales and marketing expenses – mean that of these three metrics, revenue is probably the most challenging to compare.

Also, while both Grab and Uber offer ride-hailing and food delivery services, they operate other business lines and do so in different geographies. For example, Grab offers financial services, including a digital bank; while Uber operates a freight business. The latter also has a global presence, in contrast with the former’s South-east Asia focus.

That said, ride hailing and food delivery dominate the top lines of both businesses; although the balance between the two differs.

Follow the leader

Notwithstanding the caveats above, tracing the development of the two companies’ earnings over the years suggests Grab could achieve operating profit around two years from now.

On an adjusted-Ebitda basis, Uber achieved overall breakeven in Q3 2021. It took seven quarters after that for it to generate an operating profit.

Meanwhile, Grab’s most recent guidance to the market is that it expects to achieve adjusted-Ebitda breakeven in Q4 of this year.

Assuming it will take Grab a similar timeline of seven quarters to get from Ebitda breakeven to operating profit, that would bring us to Q3 2025.

Of course, such a comparison is fairly simplistic.

Another means of comparison is to look at what Uber’s adjusted Ebitda as a percentage of gross bookings was in its most recent quarter, and use that as a milestone that Grab would need to hit to achieve operating profit.

Grab’s adjusted Ebitda for Q1 2023 is -1.3 per cent of total gross merchandise value (GMV). In contrast, Uber’s adjusted Ebitda for Q2 2023 is 2.7 per cent of gross bookings.

Grab’s Ebitda as a percentage of GMV has, however, been increasing at a rate faster than Uber’s. This means that assuming Grab maintains its current trajectory, the company may take fewer than seven quarters to achieve the same milestone.

One of the factors that will determine the speed of Grab’s earnings growth is the extent of losses at its financial services segment. The business is the only one of its four units to still be negative on an adjusted-Ebitda basis.

As Grab chief financial officer Peter Oey noted in the company’s Q1 2023 earnings call, Grab will incur costs when launching digital banks in Malaysia and Indonesia in the second half of 2023.

The company is expecting losses from those launches to be offset by falling costs in the rest of its financial services arm, GrabFin, resulting in “flattish levels of Ebitda loss”, Oey said.

Do the numbers add up?

Putting the Uber comparison aside, we can also get a sense of Grab’s road to operating profit by considering forecasts of its financial position.

A research report on Asean Internet companies published by Morgan Stanley this month predicts Grab will reach US$137 million in adjusted Ebitda in 2024.

In order to achieve operating profit from that point, factors such as share-based compensation, depreciation and amortisation, as well as net interest expenses will have to be taken into account.

The question is whether these expenses can fall to US$137 million or less by 2024.

Net interest expenses should decrease further in the next two years. In fact, Grab prepaid US$600 million in debt ahead of a 2026 maturity in March this year to reduce its gross debt balance and generate interest savings.

Laying off 11 per cent of its workforce earlier this year would likely lead to lower stock-based compensation.

Depreciation and amortisation is trickier to assess. Grab managed to cut this amount by more than half from 2021 to 2022. It is difficult to predict how this will change going forward.

The company owns a motor vehicle fleet that it rents to drivers who do not have their own cars. This fleet is a depreciating asset. An expansion through a planned acquisition of Trans-cab – a move still pending regulatory approval – is likely to result in higher depreciation expenses.

This should be kept in mind even as Grab acquires heavy assets such as Jaya Grocer.

Assuming Grab manages to halve its net interest expense, hold depreciation and amortisation steady, and reduce share-based compensation by a third, those expenses would still come up to US$455 million.

Grab investors holding out for the long-awaited milestone of Gaap profitability are likely to have to wait till sometime in 2025 – or later – before they can celebrate. TECH IN ASIA