Last week, we saw the largest SPAC deal to hit the market, and it could be great timing.
Altimeter Group Corp. (NASDAQ: AGC) announced it would bring Softbank-backed (OTCMKTS: SFTBY) Grab stock public in a deal that could value this giant at $40 billion.
That comes at the perfect time because the SPAC market is ripe for opportunity.
While the entire SPAC market has had a major pullback, it looks like we have gotten close to bottoming out, and the average SPAC premium is at 3.0%, while the median is at -0.8%, the lowest since November last year according to Accelerate Shares.
While this shakeout has been happening, investors have seen recent deal announcements on companies with very little revenue come down sharply. This is why I have updated part of my criteria for selecting SPACs to invest in. I am now looking at deals where the company is profitable or has a clear path to profitability.
With these new criteria in mind, I've been reading though the recent deal announcement.
Why Grab Is Exciting Investors
Grab is one of the most high-profile companies to go public out of Southeast Asia. Founded in 2012 to make taxi rides safer in Malaysia, it quickly expanded. In 2013, it introduced the business in Singapore and Thailand, and now in 2021, it operates in eight countries in Southeast Asia.
Not only is it a category leader in ride-hailing; over the last several years, it has become an app deeply integrated into consumers' lives. It became Southeast Asia's first "superapp" by adding in delivery and financial services to its product suite, giving customer a one-stop shop for all its services. All of these businesses have seen rapid growth.
$3.1 Trillion in New Wealth
Experts are comparing this new tech's magnitude to the invention of the Internet itself. Get in before the crowd catches on.
$3.1 Trillion in New Wealth
Experts are comparing this new tech's magnitude to the invention of the Internet itself. Get in before the crowd catches on.
Just like in the United States, where catching an "Uber" has become a verb, the same has happened for "Grab" in in countries like Singapore.
With food delivery and ride-hailing still in their nascent stages, we could see future growth and market expansion much like we have seen in the United States, as online disruption is still very early.
Right now, online food delivery has only an 11% penetration rate vs. 21% in the U.S. and China, and on-demand mobility is only 3% of spend on personal transport vs. the United States at 5% and China at 15%. As a leader in this space, Grab could be the first to benefit and has seen impressive growth.
Its mobility business, which saw some slowdown in 2020, is expected to grow at a 35% CAGR though 2023 and is already EBITDA-positive. Its delivery service is set to grow even faster at a 39% CAGR through 2023 and saw significant growth through the pandemic. It went from $0.6 billion in gross merchandize volume in 2018 to $5.5 billion in 2020, a CAGR of 203%.
Its third major business is also very exciting, as digital financial services are growing very quickly. Electronic transactions by volume in Southeast Asia were only 17% versus the United States at 82%. Grab offers several services, including payments, loans, insurance, banking services, and wealth management. In 2019, this business was only doing $2.2 billion in total payment volume and is expected to do almost $20 billion in 2023.
All of these services combined have pushed its more than 187 million users to spend $12.5 billion on the platform in 2020. Its users who joined the app in 2016 are spending 3.63x in their fifth year on the app. Users that came on between 2017 and 2020 look to be growing their spending at an even faster rate, helping to grow gross merchandise volume to 34.2 billion in 2023, over 170% growth from 2020.
In a SPAC market noted for bringing companies with little revenue and big hype public, Grab's growth makes it an instant standout.
But before we buy, we need to make sure Grab stock will be a good deal for investors.
Is Grab Stock a Buy Now?
Grab is clearly hitting on a massive, underpenetrated opportunity, and while it's not the only player in the space, as it is competing against companies like Sea Ltd. (NYSE: SE), Gojek, Deliveroo, and Foodpanda, there looks to be plenty of room for multiple players to grow.
As a leader in the market and the only superapp at scale, it could outgrow its competitors.
But given the lofty valuation, I plan to keep this on my radar for now. Altimeter Growth has traded as high as $16.75 and is currently trading down roughly 17% from when it announced the deal on April 13. One nice thing about the deal structure is that there is a three-year lock-up on sponsor shares, which may help with some of the volatility and concern that backers will try to get out quickly.
With ride hailing as a large part of its business, there is also some dependence on an open economy. I plan on waiting until we hear some commentary during earnings, as that would give some confidence in investing in this stock. If the sentiment is positive, it could be time to start averaging in.
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