Last week we saw the largest SPAC deal to hit the market, and it could be great timing. 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 through the recent deal announcement from Altimeter Group Corp. (NASDAQ: AGC), which announced that it would bring Softbank Group Corp. (OTCMKTS: SFTBY) backed Grab public in a deal that could value this giant at $40 billion.
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, they quickly expanded as they had realized the potential. In 2013 they introduced the business in Singapore and Thailand, and now in 2021, they operate in eight countries in Southeast Asia.
Not only are they a category leader in ride-hailing, over the last several years they have become an app deeply integrated into consumers’ lives, adding in delivery and financial services to their product suite to become the #1 super-app. All of these businesses have seen rapid growth.
Just like in the United States where catching an “Uber” has become a verb, the same has happened for “Grab” 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 US as online disruption is still in its very early stages.
Right now, online food delivery has only an 11% penetration rate vs 21% in the US and China and on-demand mobility is only 3% of spending on personal transport vs the US at 5% and China at 15%. As a leader in this space, they could be the first to benefit and have seen impressive growth.
Its mobility business, which saw some slowdown in 2020, is expected to grow at a 35% CAGR through 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 merchandise volume in 2018 to $5.5 billion in 2020, a CAGR of 203%.
Their third major business is also very exciting as digital financial services are growing very quickly. Electronic transactions by volume in Southeast Asia was 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 the 5th year and users that came on in the next three years, look to be growing spending at an even faster rate, helping to grow gross merchandise volume to 34.2 billion in 2023, over 170% growth from 2020.
Is it time to buy?
Grab is clearly hitting on a massive, underpenetrated opportunity, and while not the only player in the space as they are 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 super app at scale, they could outgrow their 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 they announced the deal on April 13th. One nice thing about the deal structure is that there is a 3-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.
Of course, a business like this one also depends on strong internet connection to provide its services to its customers. And it’s not alone. A huge portion of the tech sector would be nothing without strong internet connections to reach its users.
But that’s a strength, not a weakness. Internet connections are about to get much faster thanks to 5G technology, and that’s going to mean massive profit potential for the entire collection of companies that use it to do business. It could also mean massive profit potential for you. Click here to see how.