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Uber's IPO flop bodes ill for Grab and Go-Jek

Southeast Asian 'decacorns' must show path to profitability, say experts

Valuations for Grab and Go-Jek have ballooned above $10 billion over the past year, but both companies have to show they can be profitable. (Photo by Ken Kobayashi)

SINGAPORE/JAKARTA -- Southeast Asian ride-hailers Grab and Go-Jek must show a path to profitability before going public, say experts, with investors more wary after lackluster IPOs from Uber Technologies and Lyft.

Valuations for Grab and Go-Jek have ballooned above $10 billion over the past year, attracting a host of blue-chip backers including Japan's SoftBank Group, Toyota Motor and Microsoft, as well as Google, Tencent Holdings and JD.com.

But with Uber and Lyft both marking operating losses of $3 billion and $977 million last year respectively, both companies have been given a harsh welcome by markets since their high profile debuts, adding to pressure on Grab and Go-Jek which have also failed to show they are profitable.

"What Grab and Go-Jek need to show is either a clear path to positive cash flow and profitability or preferably, actual profitability," said Jeffrey Halley, senior market analyst at Oanda in Singapore.

Halley said Grab and Go-Jek need to prove a sustainable business model that "doesn't require vast injections of venture capital every six months to sustain a market share driven scorched earth business model."

Shares in Uber, which holds a 23% stake in Grab, fell to a low of $36.90 on Tuesday before rallying to close at $39.96, 11% below Friday's debut price of $45. Lyft, which went public in late March, also rallied slightly on Tuesday, with its shares closing at $50.52, still 30% below its $72 list price.

Traders gather at post where Uber Technologies Inc. holds it's IPO on the floor of the New York Stock Exchange (NYSE) in New York on May 10.   © Reuters

"The Uber and Lyft IPOs show that public capital markets are skeptical that ride-hailing companies have a strong path to profitability that would justify the high valuations implied by private fundraising rounds," said Walter Theseira, a transport economist at Singapore University of Social Sciences, told Nikkei Asian Review.

"What was not known before the IPOs was whether the public capital markets would be willing to accept the substantial risk that ride hailing companies would either never become profitable, or, would only become profitable at moderate rates of return on capital," said Theseira. "The IPOs have shown that public belief in the business model's capability to become highly profitable is more muted than thought."

With Grab currently valued at $14 billion and Go-Jek at $10 billion, according to CB Insights, making them Southeast Asia's only two "decacorns" -- unlisted startups valued $10 billion or higher -- the Uber and Lyft IPOs could negatively affect Grab and Go-Jek's plans to float.

"Given the IPO performance of Lyft and Uber so far, it will certainly not result in richer valuations for other ride-hailing companies," said Tom White, a senior research analyst at D.A.Davidson in the U.S.

A more pertinent challenge weighing on Grab and Go-Jek will be convincing later stage investors to participate in further fundraising rounds before proceeding with an IPO, noted Mark Suckling, a principal at Singapore-based Cento Ventures.

And with Grab and Go-Jek still engaged in a costly fight for supremacy across Southeast Asia, an analysis by Singapore's DBS Bank suggests that only one player can be profitable in the pure ride-hailing business.

"Other players have to demonstrate the ability to leverage their user base and asset base to venture into other profitable businesses," said the bank's tech analyst Sachin Mittal.

Still, with Grab and Go-Jek positioning themselves as "super apps" -- one-stop apps offering an array of services including food delivery, insurance, e-payments and video streaming, the Southeast Asian ride-hailers may be able to boost their profit potential by expanding into areas that Uber and Lyft have so far failed to capitalize on.

"It's important to understand that our business - both our business and our operating model - is quite different from Uber or Lyft," a Grab spokesperson told Nikkei.

"We have many more services, such as our integrated payments network and we are pushing our strategy to become the everyday super app, to encourage cross-usage of our verticals," the spokesperson said. "We believe this will be a powerful tool to enhance existing network effects and at the same time offer more services to our users."

That's a view backed by Daniel Ives, a research analyst at Wedbush Securities. "The financial services they provided diversify the revenue streams, which will help them on the path to achieve profitability," Ives said.

Cento Ventures' Mark Suckling shared a similar sentiment.

"Since 2018, Grab and Go-jek have always branded themselves as 'super-app' companies rather than ride-hailing companies, probably indicating that the ride-hailing narrative may have already been finished in the region," Suckling said.

"Through this, both Grab and Go-jek are planning to tackle larger inefficiencies in the region besides mobility which may provide them with an alternative path to profitability."

Nikkei staff writer Yifan Yu in Palo Alto, U.S., contributed to this story.

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