$GRAB - Our Sleeper Stock Pick

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What is GRAB?

Grab Holdings Inc. is a prominent Southeast Asian technology company that originally started as a ride-hailing platform but has since expanded into various services, including food delivery, digital payments, financial services, and more. It’s often referred to as a "super app" due to the broad range of services it offers in a single platform.

Behind the Numbers:

Currently, Grab trades at a cash-to-market capitalization ratio of approximately 47%, a significant increase from 30% from a couple years ago. This indicates strong cash management without shareholder dilution, providing a substantial runway to support continued top-line growth. The company has already achieved GAAP profitability, is free cash flow positive, and is experiencing over 50% year-over-year growth in adjusted EBITDA. We love companies that have positive free cash flow already. It is a great sign of a healthy company. One of the main things that we look for in strong companies. One of the concerns that we have is profit squeeze. Grab's cash reserves facilitate this transition, as to other platform businesses like Uber and Amazon, which prioritized market share before focusing on margin expansion. Should Grab continue to grow while enhancing margins, its competitiveness will continue to be stronger, and we believe the market will eventually re-evaluate the stock favorably, presenting a better risk-reward opportunity.

Grab has consistently expanded its user base each quarter over the past two years, including the first quarter of 2025—a period typically characterized by seasonal challenges—demonstrating strong product-market fit and user engagement. With a population exceeding 700 million in Southeast Asia and Grab's current penetration below 6%, the growth potential remains substantial. As the region undergoes digital transformation, demand for core services such as mobility, deliveries, digital banking, and payments is expected to rise—services that Grab is well-positioned to provide under its superapp model. At a recent event, the company introduced several new products: GrabFood for One, Grab for Family, Teens Shared Saver, Advance Booking (Airport Pickup), Dine Out Discovery (Powered by GrabMaps), and Grab Travel Pass. We anticipate the introduction of more such products, which, if successful in driving user engagement, should contribute to top-line growth.

Grab has immense potential for long-term growth in Southeast Asia, a region poised to be one of the most dynamic emerging markets over the next decade. Grab is strategically positioned to capitalize on this growth by enhancing its network effects at an impressive annual rate of approximately 20%. This growth is driven by the increasing demand for digital services and the inherent stickiness of its platform, which keeps users engaged and loyal.

For business-to-consumer companies with extensive networks, like Grab with its 45 million monthly users, introducing new products is relatively straightforward. The critical question is whether these products are valuable enough to gain traction. The recently announced products, such as Dine Out Discovery, Food for One, Shared Saver, and Airport Pickup, appear promising in terms of driving engagement and growth. If Grab can introduce 5-10 new products annually that incrementally deepen user engagement, the platform's stickiness and increased regional consolidation should position the company for dominance over the next decade. While competitors exist, none have demonstrated Grab's ability to grow and retain users at scale, nor have they matched its commitment to investing in customer engagement. Although this strategy has impacted margins, Grab's superior user experience is a competitive advantage that enhances stickiness and underpins future monetization across its ecosystem—from merchant services, such as advertising and loans, to its financial products. Continued user growth will be crucial to unlocking the broader flywheel and scaling high-margin verticals over time.

Grab’s journey to free cash flow (FCF) positivity mirrors Uber’s in length but not entirely in pace. Uber didn’t post positive FCF until Q2 2022—roughly 13 years after its founding and three years after its IPO—after years of heavy subsidies and losses. Grab, founded in 2012, reached FCF positivity for full‑year 2024, about 12 years in, but just three years after going public. While Uber burned billions before turning the corner, Grab has shown a slightly leaner path to the same milestone, benefiting from a more concentrated geographic focus and lessons learned from Uber’s playbook. That said, like Uber in its early profitable quarters, Grab’s FCF remains vulnerable to swings in working capital and reinvestment needs, meaning consistency will be something that we are looking out for.

Two Big Areas of Growth:

Grab's financial services business is growing at approximately 40% year-over-year and is not yet profitable on an adjusted EBITDA basis, but the company projects breakeven by 2026. We believe this could occur sooner, but even if it does not, the business model offers numerous monetization opportunities within the underbanked population of Southeast Asia. Once users entrust their finances to Grab, they are more likely to utilize other products offered by the platform, and vice versa. Financial services are poised to become a significant revenue stream, provided the company continues to manage loan risks effectively. With millions of users on the platform, extending loans to merchants needing additional capital or consumers requiring funds for rent presents a substantial opportunity that can be leveraged through Grab's network effect.

Advertising represents another significant opportunity. As of the first quarter of 2025, Grab had 191,000 active advertisers, representing only 3% of its 6 million merchants. The take rate on advertisements is approximately 1.7%, increasing year-over-year but still relatively modest. Grab has a considerable opportunity to deepen its advertising penetration and enhance margins without raising mobility or delivery take rates by emphasizing the advertising potential. Advertisers are drawn to Grab due to its extensive user base, creating an exciting network effect that can scale meaningfully. However, it is essential to continue developing targeting technology that advertisers prefer while expanding the user base to ensure the effectiveness of advertisements.

Investors who are buying in:

Notably, Howard Marks, a renowned investor, through his firm Oaktree Capital, acquired 10 million shares in the first quarter, signaling strong confidence in Grab's future. Other significant investors include Ray Dalio, who holds 6 million shares, and Chase Coleman of Tiger Global, who began purchasing shares in 2022 and currently holds a substantial 92 million shares. Although Coleman has not made additional purchases in recent quarters, he has also refrained from selling, indicating a long-term commitment to the company.

Possible Aquisition’s:

Those familiar with Grab's trajectory are aware of ongoing negotiations to acquire one of its largest competitors in Indonesia, GoTo. One reason for Grab's less-than-optimal margins is competition. GoTo, however, cannot sustain cash burn to compete with Grab. It is not profitable, and its stock has declined by 80% from its peak. In contrast, Grab is profitable and, despite not having the best stock performance, faces minimal bankruptcy risk due to its cash liquidity. The company recently raised $1.5 billion without difficulty. GoTo, lacking a clear path to profitability, will struggle to raise funds easily. This potential acquisition could further solidify Grab's market position and reduce competitive pressures, allowing the company to focus on enhancing its margins and expanding its service offerings.

Concerns:

Despite Grab’s recent progress toward profitability, several headwinds could pressure the stock and temper investor expectations. Competition remains fierce across all of its core segments, financials services and mobility. These promotional battles risk eroding margins and could force Grab to spend heavily just to maintain market share. Regulatory uncertainty adds another layer of complexity—governments across Southeast Asia continue to evaluate new rules around gig worker classification, lending practices within Grab’s financial services arm, and data privacy, all of which could lead to higher compliance costs or operational restrictions. There’s also the challenge of monetizing its ‘super app’ vision: while the ecosystem approach has potential, cross‑selling users between services may not scale as efficiently as management hopes, particularly in lower‑income markets where price sensitivity is high. Any slowdown in demand for core services like food delivery, whether from consumer spending pullbacks or competitive pricing pressure, could quickly ripple through Grab’s platform, stalling growth and impacting free cash flow momentum. While we think the company has addressed a lot of these concerns in a positive way, that does not mean that the stock may have some volatility in the near future which is why we have a long term approach.

Our GRAB Thesis:

The primary opportunity for Grab lies in its ability to aggregate demand across various services. Unlike Uber, whose core business is centered around mobility, Grab's largest segment is its food delivery service, which is complemented by a robust financial services division. This unique positioning allows Grab to evolve into a demand-driven platform, converting users of its food delivery or financial services into mobility users through bundled subscriptions, such as Grab Unlimited. Drivers are incentivized to join Grab not solely for commissions but because it is where demand is concentrated. This dynamic contrasts with Uber's strategy, which primarily leverages its extensive mobility user base to expand its food delivery business. We currently hold GRAB in our portfolio and are continuing to add a small amount of money over time. This is a long-term holding, and we are excited to see what the future holds.

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Disclaimer: The information provided in this newsletter is for educational and informational purposes only and should not be considered financial, investment, tax, or legal advice. While we strive to ensure accuracy, we make no guarantees about the completeness, reliability, or timeliness of the content. All investing involves risk, including the potential loss of principal. You should conduct your own research or consult with a qualified financial advisor before making any investment decisions.