For the uninitiated, “unicorn” is a term used in the venture capital industry to refer to a private startup with a valuation of over $1 billion.
Sea and Grab are the only two companies from Singapore that have grown from start up to unicorn and now to a listed company. Both companies are currently listed in the US and are keenly watched by many investors locally in Singapore, in Asia and globally as barometers of the performance of Asian tech companies. Both companies are also included in various MSCI indices such as the MSCI Singapore Index. Many investors who want to gain exposure to a tech play that’s Asia ex-China & Japan would look at either Sea and Grab.
With both companies recently releasing decent 3Q22 results, we review and consider which is the better SG unicorn company:
The case for Sea
1) Strong recent quarter performance
Despite tough macroeconomic conditions, Sea was able to deliver overall growth of 17% YoY to record revenues of $3,156 million. This is higher than previous quarters and in line with the high of $3,222 million in 4Q22. Revenue growth was attributable to two out of three segments, namely e-commerce and digital financial services while the Digital Entertainment segment recorded consecutive declines.
2) Prioritization on cost control
Sea has done well to prioritise cost control as the utmost important objective to as to tide through these uncertain times. Sea has exited markets, reduced employees and terminated leases early to conserve cash.
In the 2Q22 quarter, Sea’s CEO Forrest Li and his leadership team has also decided not to take any cash compensation until the entire company reaches self sufficiency.
In this most recent 3Q22 quarter, the first paragraph of its 3Q22 results report reads:
“Given the significant uncertainties in the macro environment, we have entirely shifted our mindset and focus from growth to achieving self-sufficiency and profitability as soon as possible, without relying on any external funding,” said Forrest Li.
3) Reduction in net loss
As a result of Sea’s prioritisation on cost control, net loss also declined substantially, with net loss excluding SBC and restructuring costs reducing by 49% while net loss reduced by 39%. It has to be reitereated that Sea is actively managing its expenses to conserve its cash position.
4) Favorable valuations
Sea Ltd has a trailing twelve month revenue of $12.2 billion and at a market cap of $28 billion has a P/S ratio of about 2.3x and net loss is about 11.7% of revenue.
The case against Sea
1) Cash cow is drying up
The Digital Entertainment segment is the only profitable segment of Sea.
Looking at the snapshot below, bookings, which represents an approximation of cash spend by users has been declining rapidly. Looking on a YoY basis, amount of bookings on hand have declined by 45% from US$1,220.7 million to US$664.7 million. In addition, active users has fallen by 22% and quarterly paying user ratio fell by 29%.
Putting this into user numbers, paying users fell from 93.3 million to 51.7 million, a nearly 45% drop, which is in line with the decline in the amount of bookings.
2) Severe cash burn and potential debt burden
Sea has a cash burn situation that is much worse than Grab with the most recent quarter recording a cash burn of $0.5 billion In addition, Sea has a $2.1 billion convertible bond with a strike price of $377 expiring in 2026 and a $1.0 billion convertible bond with a strike price of $90.46 expiring in 2025.
If Sea’s share price does not rise sufficiently, the convertibles will not be exercised and Sea will have to repay the bond by cash. As Sea has limited levels of bank borrowings, Of course the company has the possibility of looking to refinance the bonds via debt, but this will lead to an unwieldy amount of interest expense.
The case for Grab
1) Strong recent quarter performance
Grab’s 3Q22 headline numbers look good, with YoY revenue increasing 143% to $382 million, GMV increasing 26% to 5.08 billion and adjusted EBITDA increasing 24% to a loss of $161 million.
This was achieved through lower incentives provided as a proportion of GMV, with the figure declining from 11.4% a year ago in 3Q21 and 13.0% in 4Q21 to 9.4% currently. This allowed grab to reduce its adjusted EBIDTA margin to a -3.2% loss from a -5.3% loss in 3Q21 and 6.8% loss in 4Q21.
Monthly transacting users increased 30% YoY from 25.9 million to 33.5 million users with more than 62% of users using more than two services as compared to 56% a year ago.
The delivery segment also saw an adjusted EBITDA breakeven while the Mobility segment continue to see double digit margins.
Grab’s net cash liquidity position fell from $5.57 billion to $5.32 billion, indicating a cash burn of $0.25 billion, a significantly reduced rate from previous quarters.
2) Management’s guidance
Referring to the table below, the GMV growth forecast for 4Q22 is between $4.8 billion and $5.1 billion, compared to $4.5 billion a year ago and$ 5.1 billion in 3Q22. Grab has also revised its overall 2022 GMV growth to between 22% and 25% YoY.
Grab is focusing on strategic initiatives such as GrabUnlimited, GrabForBusiness, groceries, local partnerships, and advertising. At the same time, Grab is investing in its proprietary technology to enhance the efficiency of the platform. Grab also plans to focus on building up its fintech services in its existing ecosystem where it can create a platform for the launch of its digibanks.
The case against Grab
1) Incentives continue to be essential
9.4% of incentives as a proportion of GMV is still a significant number and Grab has previously set a target to reach profitability by 2H24, but with a forecasted 2H22 adjusted EBITDA loss of $315 million, profitability seems to be a distance away.
The financial services segment is still in the nascent stage of growth with revenues at $20 million with an adjusted EBITDA loss of $104 million despite total payment volumes increasing 22% to $3.8 billion and commission rate increasing significantly from 2.5% a year ago to 2.9% now.
2) Lofty valuations
Grab is trading at a market capitalization of US$12.4 billion on a potential FY23 revenue of $1.9 billion to $2.1 billion based on a targeted a revenue growth of 45% to 55%. This revenue growth will likely come from both GMV growth targets and also lowered incentives. While not a meaningful gauge, in 3Q22, Grab recorded a 90% loss margin, much higher than Sea’s 11.7%.
SEA vs Grab: Which is better?
There is pressure all around for both Sea and Grab. Sea is cutting costs because of overall burgeoning costs and a cash burn which may not last until the end of the current macroeconomic cycle environment. Grab also has a cash burn, albeit milder than Sea but may face increased cash burn for its nascent financial services segment. Sea’s only profitable segment has seen waning profits while Grab is still continuing to dole out incentives to secure transactions.
Both companies have performed well in the recent quarter and are optimistic for the near term due to the measures taken. While it seems like both companies are not out of the woods yet, we think Sea is the better SG unicorn company to buy based on market valuations and its efforts at cost cutting but will size the position accordingly due to the cash burn risk.