Software company Grab stunned Wall Street yesterday as it plummeted to $3.01, marking a -5.6% change compared to the S&P 500 and the Nasdaq indices, which logged -0.8% and -1.4% respectively. GRAB is -18.87% below its average analyst target price of $3.71, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Grab has lagged behind the S&P 500 by -38.4%, moving -56.3%.
Grab Holdings Limited provides superapps that allows access to mobility, delivery, financial services, and enterprise offerings through its mobile application in Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of Grab's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 675,000,000 | 2,230,000,000 | -230.37 | 13.43 |
| 2020-12-31 | 469,000,000 | 1,717,000,000 | -266.1 | -175.43 |
| 2019-12-31 | -845,000,000 | 2,136,000,000 | -352.78 | n/a |
- Average operating margins: -47.9%
- Average operating margins growth rate: -81.0%
- Coefficient of variability (lower numbers indicate less volatility): 725.4%
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Grab's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | -938,000,000 | -73,000,000 | -1,011,000,000 | -52.03 |
| 2020-12-31 | -643,000,000 | -22,000,000 | -665,000,000 | 69.91 |
| 2019-12-31 | -2,112,000,000 | -98,000,000 | -2,210,000,000 | n/a |
- Average free cash flow: $-1,295,333,333.30
- Average free cash flow growth rate: 8.9%
- Coefficient of variability (the lower the better): 62.6%
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for GRAB, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Grab's P/B ratio is 1.8, telling us that the market value of the company exceeds its book value by a factor of 1, but is still below the average P/B ratio of the Technology sector.
Since it has a negative P/E ratio, a lower P/B ratio than the sector average, an irregular stream of negative cash flows with an upwards trend, Grab is likely overvalued at today's prices. The company has poor growth indicators because of no published PEG ratio and negative and irregular operating margins with a negative growth rate. We hope you enjoyed this basic overview of GRAB's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
