Is GRAB Stock The Next 10x?

$Grab Holdings(GRAB)$

Grab Stock: A High-Growth Opportunity?

In recent days, Grab stock has been gaining significant attention from both retail investors and Wall Street. The stock already boasts a triple buy rating, with Quant giving it a "Strong Buy" and Wall Street analysts not far behind, assigning a 4.5 rating—just shy of a full "Buy" recommendation. This raises the question: Is Grab an undervalued play worth adding to a growth portfolio? Let’s dive into the details.

Stock Performance & Company Overview

Grab has surged 53% over the past 12 months and is showing continued strength in pre-market trading, up nearly 12%.

For those unfamiliar, Grab is a Southeast Asian technology company that started as a taxi-booking app in Malaysia in 2012. It has since evolved into a "super app," offering ride-hailing, food and package delivery, digital payments, and financial services across markets such as Singapore, Indonesia, Vietnam, Thailand, and the Philippines. Its diverse revenue streams come from services like GrabRide, GrabFood, and GrabExpress, positioning the company as a dominant player in the region.

Earnings Performance & Growth Projections

Grab is set to report earnings soon. Looking at the last four quarters, the company has met or exceeded earnings expectations 75% of the time, with only one minor miss by just $0.01. The upcoming quarter anticipates a 96% year-over-year increase in EPS.

While Grab’s 2024 EPS was negative, analysts expect a turnaround, forecasting EPS of $0.04 in 2025. However, the stock is currently trading at an extremely high forward P/E ratio of around 113, which explains its D+ valuation grade. Compared to the sector’s P/E of 20, Grab carries a significant premium, which extends across multiple valuation metrics, including EV/Sales, EV/EBITDA, Price/Sales, and Price/Book.

Why Investors Are Willing to Pay a Premium

Despite its high valuation, Grab earns an A+ for growth, with year-over-year revenue up 22% (compared to the sector’s 4%) and forward revenue growth expected to reach 33% (sector average: 5%). Free cash flow is up 571% year-over-year, significantly outpacing the sector’s 9.2% growth, while operating cash flow is up 551% versus the sector's 5.33%.

Profitability & Financial Health

Grab's gross margin stands at 42%, well above the sector average of 32% and its own five-year average of 2.74%. However, the company remains unprofitable, reporting a net income margin of -4% compared to the sector’s 6.5%. On a positive note, cash from operations reached $573 million, significantly improving from its five-year average of -$319 million.

Key Segment Performance

From its latest quarterly report:

• Overall revenue: Up 177% year-over-year

• Gross merchandise value: Up 15%

• Deliveries segment: Revenue up 13%, EBITDA up 60%

• Mobility segment: Revenue up 177%, EBITDA up 18%

• Financial services segment: Revenue up 34%, though EBITDA remains negative but is improving on a quarter-over-quarter basis

For the full year, Grab now expects revenue growth of 17-18%, above its previous guidance of 14-17%. Similarly, EBITDA expectations have been raised to over $300 million (previously $250-270 million). The company also reaffirmed its expectation for positive adjusted free cash flow in 2024.

A key takeaway is Grab’s consistent free cash flow improvement, transitioning from negative to positive territory over the past few years. Based on trailing 12-month data, free cash flow currently stands at $0.12 per share, with expectations for further growth in the next 12 months.

While Grab’s high valuation may concern some investors, its rapid revenue growth, improving cash flow, and dominant market position in Southeast Asia could justify the premium. Whether it’s a strong buy depends on how much weight you place on its long-term growth potential versus current valuation risks.

Evaluating Grab’s Growth Potential and Valuation

When analyzing investment opportunities, we often find companies that have historically struggled with negative free cash flow and weak financial metrics but have started to show quarter-over-quarter and year-over-year improvements. This is precisely what we want to assess in Grab’s case—particularly in relation to its valuation and sales growth trajectory.

Over the past four years, Grab has maintained double-digit sales growth, and for 2024, expectations stand at 17-18%. However, the key question remains: does this top-line growth justify the stock’s high valuation?

From a financial perspective, Grab has grown significantly, reporting revenue of $470 million in 2020, which has now surged to $2.36 billion. One important factor to consider is the number of outstanding shares. Ideally, companies return excess cash to investors through share buybacks, but Grab has instead diluted shareholders over the years. While this isn't typically favorable, if the company continues to outperform the S&P 500, it may not be a major concern.

Profitability and Financial Strength

Return on invested capital (ROIC) is a key metric we examine, aiming for at least 10% to ensure efficient capital allocation. However, Grab has yet to achieve a positive bottom line, as reflected in its consistently negative operating margin. That said, its operating losses have been narrowing, and the hope is that by 2024 or 2025, it will turn profitable. Similarly, its free cash flow margin, which was negative for years, now stands at approximately 18% on a trailing 12-month basis—far exceeding the minimum 5% we look for.

Another encouraging sign is Grab’s balance sheet. Its net debt to EBITDA ratio indicates a strong financial position. Over the past 12 months, its net debt has been effectively zero, and the same is expected for the next year, meaning the company could pay off all its debt instantly with its cash on hand. We’ll further verify this when reviewing the balance sheet.

Institutional Investors Are Bullish

Institutional investors have shown growing confidence in Grab. Currently, institutions own approximately 55% of the company, with $1 billion in sales over the past year. More notably, they’ve significantly increased their holdings, buying $6.33 billion worth of shares in 2024—$5.4 billion of which came in the most recent quarter. This suggests institutions are becoming increasingly optimistic about Grab’s future prospects.

How Does Grab Compare to Industry Peers?

Looking at its industry, Grab has outperformed many well-known competitors. Over the past year, the stock has risen approximately 44%, making it one of the top performers, whereas many of its competitors have delivered negative returns. However, past performance isn’t always indicative of future success.

From a revenue standpoint, Grab has shown strong and consistent growth over the past few years, with some years being particularly robust. However, the key focus remains on its net income, which, while still negative, is improving. If this trend continues, Grab could achieve a positive bottom line in 2024 or 2025.

Cash & Debt Analysis

A quick financial health check reveals that Grab’s cash position, although inconsistent, has grown over time. In 2019, its cash balance stood at $2.8 billion, increasing to $5.8 billion in the latest quarter. Meanwhile, its total debt has decreased significantly, from $8.6 billion in 2019 to just $328 million today. This reinforces its strong financial footing, as we previously highlighted—it could pay off its debt instantly with its available cash.

Regarding cash flow, the company had consistently generated negative cash from operations in previous years. However, in 2023, it turned positive, reaching $86 million, and on a trailing 12-month basis, it has surged to $573 million. This upward trajectory is expected to continue.

Valuation Analysis

Now, let’s look at Grab’s intrinsic value, which we calculated using a discounted cash flow (DCF) model. The company has faced negative free cash flow growth in previous years, but we’ve modeled different growth scenarios:

• Low case: 25% growth rate

• Base case: 30% growth rate

• High case: 35% growth rate

Based on a 30% growth rate, the present value of its future free cash flows and terminal value results in an intrinsic value of $6.18 per share, implying 12% upside.

For more conservative investors, if the company grows at only 25%, its intrinsic value drops to $5 per share, suggesting it is currently overvalued. Conversely, if Grab grows at 35%, the stock could be worth $7.75, offering a potential 40% upside.

Margin of Safety Considerations

Before making a decision, we also factor in a margin of safety (MOS):

• 10% MOS → Current price is acceptable

• 15% MOS → Target entry price: $5.25

• 20% MOS → Target entry price: $4.90

• 25% MOS → Target entry price: $4.63

Wall Street analysts currently project a 12-month target price of $5.70, implying just 3% upside from the current levels. However, the real takeaway depends on the assumed growth rate—if you believe Grab can sustain 30%+ growth, then it might be a solid long-term buy.

Conclusion

The big question: Is Grab a buy, hold, or sell?

It all comes down to how much confidence you have in its growth potential versus its high valuation. The company has shown significant revenue expansion, improving cash flow, and a strong balance sheet, but it remains unprofitable for now. We’d love to hear your thoughts—do you see Grab as a great investment opportunity, or is now the right time to take profits?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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