Grab delivered results for the first quarter of 2023 that some analysts described as “solid” and “a good set of numbers.”

Yet the market was unimpressed, sending the company’s shares down by 10% in the trading session that followed, although they have since recovered most of those losses.

Results were actually stronger than expected, with overall revenue for the quarter up 130% year on year, while adjusted EBITDA losses narrowed for the fifth consecutive quarter to US$66 million.

The company’s post-income tax loss was also its smallest ever at US$250 million.

But investors seemed to look past all this positive news and instead fixate on stagnant gross merchandise value (GMV) numbers, caused by declines in Grab’s deliveries and financial services segments.

This may seem unfair, especially since some of the slowdown in growth can be attributed to cutbacks in incentives, which were necessary to get the company on the path to profitability that investors are demanding.

Ultimately, though, Grab will have to thread this needle and find ways to grow GMV – which will feed through to its bottom line – while keeping a lid on expenses in order to maintain its profit margins.

Without GMV growth, it may be hard for Grab to achieve breakeven by Q4 of this year, as it has guided.

Revenue in deliveries, the super app’s biggest segment that consists mainly of an online food delivery platform, grew by 203% from the same period last year.

Adjusted EBITDA as a percentage of GMV reached 2.6%, an all-time high.

Grab is targeting a steady-state adjusted EBITDA margin of “3% plus” of GMV for the segment.

While there’s still some room to go before that target is reached, most of the growth in adjusted EBITDA in the long run will have to come from an expansion in GMV rather than further increases in EBITDA margin.

Perhaps this is why the market reacted so negatively to the stagnating GMV over the past few quarters.

Grab attributed part of this flat growth to the Ramadan holidays, when Muslims fast during the day. This year, part of Ramadan began at the end of Q1, whereas last year it fell entirely within Q2.

Photo credit: famveldman / 123RF

According to the company’s presentation, deliveries transactions have rebounded following the conclusion of Ramadan.

Apart from these seasonal factors, Grab expects GMV growth in its deliveries business to pick up for a number of other reasons. These include its efforts to improve affordability to attract more users as well as its initiatives to increase user engagement like loyalty program GrabUnlimited.

During the earnings call, CFO Peter Oey commented that Grab’s advertising business was “still very small” but highlighted its higher margins. He added that having a “good-scale advertising platform with sufficient reach” would help to grow the business in the future.

Grab’s mobility business continued its post-pandemic recovery, with revenue up by 72% from the previous year and adjusted EBITDA rising 85% to US$152 million, which was 12.4% of the segment’s GMV.

While the latter figure was below last quarter’s 13.2%, it was in line with Grab’s steady-state margin target of 12%.

Assuming this target remains, the only way for the segment’s EBITDA to continue going up is for GMV to increase, which is why Grab needs to keep growing.

In the short term, the revival of inbound tourism to Southeast Asia will provide a tailwind. To capitalize on this, Grab has rolled out product enhancements and partnerships to capture a greater share of tourists from markets like China, Japan, and South Korea.

See also: How Grab can benefit from rebound in SEA tourism

Another way to grow mobility is to make the platform more efficient and affordable, such as with the reintroduction of the carpooling service GrabShare across several markets and the launch of a two-wheel service in the Philippines.

Indeed, Grab attributed the decline in adjusted EBITDA as a percentage of GMV this past quarter to having “reinvested incremental margins” to that end.

Revenue for the financial services segment jumped by 233% from Q1 2022, with adjusted EBITDA loss improving by 32% over the same period.

GMV was flat year on year as Grab has continued to emphasize on-platform transactions and deprioritize off-platform ones.

The company said that its loan book grew 45% year on year, although it did not disclose the exact amount.

GXS, its Singapore digital bank joint venture with Singtel, recently launched a new lending product called FlexiLoan, although the fruits of these efforts will not show up in its financials for a while.

Grab COO Alex Hungate confirmed on the earnings call that it was “on track” to launch its digital banks in Malaysia and Indonesia later this year. However, he stressed that it was “still early days” for GXS.

See also: SG digibank GXS trails Trust in adoption as deposit cap hampers growth

In the longer term, the company says that it is focused on having the digital bank support its ecosystem and not to focus on size.

“So the size will be proportional to the GMV and the MTU (monthly transacting user) base that the ecosystem has,” said Hungate.

To round things up, Grab’s enterprise and new initiatives division, its smallest, grew its revenue and adjusted EBITDA by 29% and 676%, respectively, from Q1 2022.

Grab is not yet profitable – it continues to guide for group adjusted EBITDA breakeven in Q4 of this year. It will take even more time to get from there to net profit.

Its management now has a decent track record of showing it can cut expenses and work toward profitability. However, it cannot take its eye off the main prize, which is to take advantage of the demand for digital services from Southeast Asia’s large, underpenetrated population.

With the company already at or near its steady-state targets for adjusted EBITDA as a percentage of GMV – at least for its mobility and deliveries segments – driving future profitability and share price gains will depend on reviving GMV growth in the deliveries segment while accelerating it in mobility and other segments.

Indeed, this may be necessary just to achieve breakeven.

Grab’s Q1 adjusted EBITDA was negative US$66 million. Assume there is minimal change in deliveries GMV and quarter-on-quarter growth in mobility GMV that matches Q1’s 6%. By the fourth quarter of this year, this will give us GMV of US$2.4 billion for deliveries and US$1.5 billion for mobility.

At these segments’ respective steady-state levels of 3.5% and 12%, that gives us a combined adjusted EBITDA of around US$264 million. This exceeds Q1’s figure of US$212 million (the combined segment adjusted EBITDA for deliveries and mobility) but falls short of plugging the US$66 million deficit above.

However, CEO and co-founder Anthony Tan sounds confident that Grab can pull off accelerating GMV growth.

“Today, Grab only sells to 1 in 20 people every month. So this means there’s still plenty of room for us to grow,” he said in the earnings call.