7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

Subscribe 

 
 

An analysis of Gojek and Grab’s valuations and

pro tability prospects

1 Jun 2019 Hans de Back

 4   3

Some media outlets and analysts are casting a pall on Gojek and Grab’s future initial
public offerings. This conclusion, however, is premature: we still don’t know how
Uber and Lyft will ultimately perform. Grab and Gojek’s public listings are still several
years down the road (if they even decide to list), and both are fundamentally
different from the US transportation apps.

While Grab and Gojek face unique challenges, Uber and Lyft’s experiences could still
be relevant – but perhaps in a limited manner.

Grab and Gojek’s fundraising might be somewhat affected

Uber is trading at below US$41 per share. This means late-stage investors are
suffering a paper loss, as the company’s series G-1 round was priced at US$48.77 per
share. Lyft’s stock price isn’t doing so well, either – it’s trading well below the IPO
price.

Investors looking to buy or sell a piece of Gojek and Grab may follow these stock
prices
 closely.
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 1/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

The two super apps are still corralling investors. In February, Gojek was reportedly
seeking as much as US$2 billion. Grab said in April that it aims to haul in another
US$2 billion this year. It’s also seeking backers for Grab Financial, its financial services
and payments arm.

The US IPOs could affect ongoing negotiations between the Asian super apps and
their prospective backers. And depending on where the prices land eventually, they
could have an impact on Grab and Gojek’s future fundraising efforts and their
potential IPOs, too.

Uber and Lyft’s weak listings could cause some investors to think twice about their
Southeast Asian counterparts’ current valuations. This hesitation, in turn, could affect
Gojek and Grab’s ability to demand higher prices – a substantial chunk of their user
activity still comes from ride-hailing, which is a difficult business to profit from.

Lyft’s market capitalization of US$16.6 billion, for example, is just slightly higher than
Grab’s valuation of US$14 billion, even though its revenue of US$2.15 billion is more
than double Grab’s in 2018. Gojek hasn’t disclosed revenue figures. Granted, Lyft isn’t
an apple-to-apple comparison – as I’ll explain later.

The additional capital will matter. It gives the Southeast Asian unicorns the ability to
spend more on sales and marketing. More importantly, it buys them time to lock in
their users and hence reduce the need to spend money to acquire them and grow
market share.

That said, the super app vision will compel some investors
For Grab and Gojek, there’s a tension between their present and their future. While
these companies started in ride-hailing, their destination will look completely
different.

Their current valuations rest on the dream of becoming Southeast Asia’s leading
super apps. That’s the dream investors are buying into.

The notion that these rivals are just transportation apps is outdated.


https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 2/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

A Grab spokesperson tells Tech in Asia that ride-hailing forms only 60% of the firm’s
revenue – with payments and food delivery driving much of the income growth.
Earlier this year, Grab said that “one in three active Grab transport users in Singapore
use the GrabFood app.”

Gojek tells the same story. “I should point out that payments is our biggest business,
followed by food,” a company spokesperson says, adding that it’s playing in 21
verticals.

In 2017, food delivery appeared to be almost equal to transport in terms of GMV,

confidential data shows.

Their super app ambitions and Southeast Asia’s supposed potential could be
boosting their valuations. Gojek, for instance, is priced at US$9.5 billion.

Indeed, a comparison with Uber and Lyft may not be entirely fair, given that they’re
primarily ride-hailing businesses.

<img src="https://cdn.techinasia.com/wp-
content/uploads/2018/06/grabshuttleplus2.png" alt="GrabShuttle Plus van"
width="813" height="485">

Photo credit: Grab

Last year, Chinese tech titans Alibaba and Tencent – the vastly profitable pioneers of
the super app approach – were trading at multiples (specifically, annual revenue
against market cap) matching or exceeding Grab and Gojek.

The same can’t be said for Meituan-Dianping, though. The relatively younger and still
unprofitable Chinese super app saw a multiple of 5.6x at its public market debut.

It seems the common thread among the high valuations of the Southeast Asian super
apps may be Southeast Asia itself. Sea Group, the only public-listed unicorn that’s
mainly serving the region, is currently seeing a 14x multiple (similar to Grab).

In other words, how investors view Gojek’s and Grab’s valuations may have a lot to do
with
 how bullish they are about the region and their abilities to capitalize on its
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 3/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

growth.

Regardless of how some investors think, the two companies can employ tactics to
raise money without being encumbered by ride-hailing.

As we’ve explained in this piece about Grab’s fundraising efforts for its latest business
unit: “Any funding deal with Grab’s financial services could resemble Central Group’s
US$200 million strategic investment in Grab Thailand earlier this year. That
transaction saw a specific Grab business unit, rather than the overarching corporate
entity, get funding in return for giving up a non-controlling stake.”

A more extreme method of segregating a big business would be to spin off entire
business units, just like what Alibaba did with Ant Financial.

“Spinoffs counter what’s called a conglomerate discount, where the collective value of
business units are worth more separate than together… By dividing the business
units, investors are emboldened to put money into the unit they believe in without
worrying about the unit they don’t. To use an analogy, why force people to buy both
an apple and a pear if they just like the apple?” the article pointed out.

That said, because of the nature of the super app strategy as currently conceived, a
clean separation might be impossible. It might also be unnecessary.

After all, ride-hailing is a crucial piece of the game plan for super apps. Grab or Gojek
might be able to raise even more money for a business unit if they were to
emphasize how their existing ecosystems serve as massive funnels to bring
customers over.

Actually, Uber and Lyft validates the super app strategy

Looking at Uber and Lyft’s numbers, ride-hailing looks like a challenging business
model from a profitability perspective. Cost of revenue is significant due to insurance
expenses. Operation and support costs are high due to driver and customer support
as well as driver background checks. Because ride-hailing is about moving people or
things physically, it has higher marginal costs compared to software. In this sense, it’s
similar to US ecommerce giant Amazon, except transporting humans carries more

liability than inanimate goods.
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 4/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

Profitability may be achievable, but these businesses would need to keep growing
and cut back on subsidies just to earn a razor-thin margin.

Amazon and Alibaba’s current sales and marketing costs are only 6% and 12% of
revenue, respectively, compared to Lyft’s 35% and Uber’s 28%.

At what scale can ride-hailing be profitable? With a GMV of US$50 billion for 2018
(which includes its smaller food delivery business), Uber looks to be within striking
distance, though its revenue growth has slowed and margins have not improved.

Its operating loss as a percentage of revenue is 26.8%. That’s the gap it has to close if
it wants to be in the black.

Lyft, which only relies on ride-hailing, has an annual gross merchandise value (GMV)
of US$8 billion, and its operating loss is 29% of revenue for the first quarter of 2019 –
nearly the same level as Uber’s.

<img src="https://cdn.techinasia.com/wp-content/uploads/2018/03/gojekd2.png"
alt="Go-Jek delivery" width="1054" height="792">

Photo credit: Go-Jek

How do Gojek and Grab’s ride-hailing numbers look like in comparison? We know
that their businesses are smaller in terms of revenue than their US counterparts.

We also know that the average transportation fees for Grab and Gojek are likely to be
cheaper compared to the US apps, and therefore affecting per-ride revenue (though
their costs are correspondingly lower, too).

As such, we see a long route to profitability for ride-hailers in Southeast Asia. Gojek
co-founder and CEO Nadiem Makarim even describes a profitable ride-hailing
business as an “optimistic” scenario in an interview with the Nikkei Asian Review. He
adds that a more realistic goal would be for the segment to break even.

The good news is that Southeast Asia’s large population of 634 million (versus 327
million in the US) would mean a large market for transportation even though the
revenue
 per trip and gross domestic product per capita might be a fraction of the US.

https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 5/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

And if Southeast Asia can meet its long-term growth potential, the economics for
ride-hailing might look better moving forward.

Given the challenge with ride-hailing, the strategy of building an ecosystem that
offers consumer, finance, and payment services a logical alternative for the two super
apps. We’ll look at each component in turn.

Does food delivery improve Gojek and Grab’s chances of becoming

profitable?
We see the food delivery business already contributing significantly to Grab and
Gojek’s GMV. It’s a trend that could increase. However, its ability to improve their
margins may be limited.

Uber’s projections for food delivery are a fraction of the ride-hailing business. The
take rate is lower as well: it’s 10% for food delivery versus 20% for ride-hailing. A scan
of food delivery businesses around the world reveals a take rate of around 12% to
17%. We believe these patterns also hold true for Southeast Asia.

Like ride-hailing, food delivery businesses are still finding their way to profitability.

Delivery Hero, a global food delivery player, is in the red. Its gross profitmargin
stands at 52% but its net loss (adjusted EBITDA) margin hovers over 20% due to the
high sales and marketing expenses.

Meituan’s food delivery business – which claims to be the largest in the world with
US$41 billion in annual transactions – also likely isn’t profitable due to its low gross
profit margin of 13.8%.

<img src="https://cdn.techinasia.com/wp-content/uploads/2018/07/meituan-
waimai.jpeg" alt="" width="900" height="599">

Meituan Dianping delivery drivers / Photo credit: Meituan-Dianping

Theoretically, we see food delivery complementing ride-hailing by increasing the

utilization rate of drivers. If a driver can deliver people, goods, and groceries, they can

https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 6/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

make more money for each hour they work. The happier drivers are with their
incomes, the lesser the need for companies to spend on driver incentives.

In practice, there are kinks to work out. In Singapore, private drivers and taxis aren’t
allowed to deliver goods without passengers on board. There’s also the complexity of
managing many different types of deliveries on one platform and getting drivers and
riders to be proficient in all of them.

The good news is that according to research, Grab and Gojek bikers in Indonesia earn
extra income when they’re on the app compared to when they’re tapping those
services.

Like ride-hailing, profitability in food delivery is a long-term project. A lot of it has to

do with how the business owns just a small slice of the supply chain: the ordering
interface, the order management system, and a network of delivery people. Cloud
kitchens offer a possible way to get over the hump, but the concept is still in its
infancy.

What about payments and finance?

Grab’s and Go-Jek’s move into payments and finance is ambitious but not
unprecedented. They’re following the examples of Alibaba and Tencent.

The playbook is as follows: first, build an extremely popular consumer service or

marketplace, which in this case is ride-hailing and food delivery.

Second, offer a payment gateway or e-wallet on top of those services to improve user
experience, own a larger part of the value chain, and improve the bottom line. Extend
the payment service to retailers outside of the network, thereby roping them into the
network.

In other words, instead of paying transaction fees to other providers, Grab and Gojek
get to keep the money for themselves. Payments have attractive margins – look at
Paypal and Adyen – due to low marginal costs.

For Uber, almost 10% of its revenue is spent on credit card processing fees alone.

That gives an indication of the revenue potential for Grab and Gojek if they can
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 7/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

successfully onboard consumers onto its payment solutions.

The super apps could strike gold if their e-wallets can capture a significant portion of
all their users. That’s an option Uber and Lyft do not have.

<img src="https://cdn.techinasia.com/wp-content/uploads/2018/02/Grab-GrabPay-
photo-02.jpg" alt="" width="1280" height="720">

Photo credit: Tech in Asia

Let’s say a super app hits US$10 billion in GMV and half of those transactions are
routed through an in-house payment system. If that e-wallet charges a 3% fee on
those transactions, then it could yield US$150 million in revenue. That’s money that
perhaps would otherwise have gone to another payments provider.

In Indonesia, drivers are already functioning as top-up points for e-wallets. Both
companies have cultivated a network of agents to facilitate cash top-ups and
transactions in remote locations. Go-Pay and Ovo – Grab’s payments partner in
Indonesia – are ubiquitous in the country.

The idea of owning an integrated e-wallet is to create a closed money flow covering
large swaths of the population that don’t own credit cards. The dream is that the vast
majority of people in Southeast Asia – many of whom are unbanked – will circulate
their cash entirely within these ecosystems.

The vast amounts of transaction data set the stage for the super apps’ financial
services play. By understanding how consumers top up their wallet and spend
money, Grab and Gojek can form a picture of their creditworthiness. This is difficult
for traditional financial institutions in cash economies to achieve.

The next natural step for the super apps is to provide financial services like loans,
insurance, and perhaps even investments, which are high-margin and well-
established businesses. Again, it’s nothing new – think PayPal and Ant Financial.

The only path


https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 8/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

It’s hard to imagine Gojek and Grab going down any other route. Uber, Lyft, and
China’s Didi Chuxing face entrenched competitors outside of ride-hailing in their
home markets, while the field is wide open in Southeast Asia.

The super app strategy, however, is not without its risks. The assumption that
bundling transportation, food delivery, logistics, payments, and financial services will
lead to something greater than the sum of its parts is unproven.

Another issue is the blistering pace at which all of this is developing, fueled by money
from various investors. Imagine a 7-year-old company building ride-hailing, food
delivery, payments, and financial businesses all at once – and then tying them all
together.

<img src="https://cdn.techinasia.com/wp-content/uploads/2018/06/gjdriver.jpg"
alt="" width="800" height="600">

Photo credit: Gojek

Typically, companies expand into other verticals only once they’re reaching stability in
their original vision. Alibaba, for example, launched online marketplace Taobao and
financial services provider Alipay only in 2003 – a year after the company became
profitable and four years after it was established.

Its online marketing platform Alimama arrived in 2007, Alibaba Cloud came online in
2009, and logistics firm Cainiao was set up in 2013. That year also saw Ant Financial
(formerly Alipay) roll out its money market mutual fund.

Grab and Gojek are attempting to build an ecosystem on top of two consumer
services that have yet to turn profitable. Their accelerated timetable is certainly
influenced by the large sums of money they’ve been able to attract.

As such, all talk about profitability and revenue has to be tampered by the high sales
and marketing costs as well as incentives for riders, drivers, and merchants – which
may have a distorting effect on GMV and revenue. It’s hard to predict how well these
platforms will do if incentives and marketing expenses are dramatically reduced in a
less aggressive market.

https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 9/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back

But another reason for the haste might be the fact that the training wheels are off, so
to speak.

Grab and Gojek companies are taking the blueprint from China and tweaking it to
suit emerging economies that resemble how the North Asian country was just a few
years ago. It’s almost like they’re constructing an airplane as it accelerates down a
runway – with the hopes that it will take off in time.

We won’t need to wait too long to find out how this experiment will turn out.

{
An analysis of Gojek and Grab’s valuations and profitability prospects

https://www.techinasia.com/analysis-grab-gojeks-valuations-profit…

More posts by Hans de Back

Grab raises $300m additional funding from asset manager Invesco


Hans de Back
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 10/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back
Hans de Back

Singapore ‘actively studying’ virtual banking licenses

Hans de Back

Microinsurance is coming for the masses in Indonesia

Hans de Back

Brex valued at $2.6B with new cash from Kleiner Perkins

Hans de Back

Banks and Corporates Need to Rethink How They Approach Innovation—Again

Hans de Back

Recent posts from Finch Capital

Facebook's WhatsApp hires senior exec from London remittances startup: sources
Radboud Vlaar

IBF: Transformation of the Dutch Mortgage market

Radboud Vlaar

Squirro: How AI could shape the future of investment banking

Radboud Vlaar

TransferWise Launches U.S. Debit Card Customers Can Use Abroad

Aman Ghei

Monzo raises at £2b valuation, boss upbeat on progress despite mounting losses

Aman Ghei
https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 11/12
7/2/2019 An analysis of Gojek and Grab’s valuations and profitability prospects, Hans de Back
Aman Ghei


https://news.finchcapital.com/post/102flag/an-analysis-of-gojek-and-grabs-valuations-and-profitability-prospects 12/12