GoTo is an expensive journey, but it gets you somewhere

The long-awaited debut of GoTo, the combination of ride-hailing app Gojek and e-commerce company PT Tokopedia, offers investors plenty of choice. Place your bet on short-term metrics like valuation and growth, or take a longer look at Indonesia’s burgeoning middle class and digital economy.

Based on the numbers alone, GoTo’s IPO looks expensive. Subtract the estimated $4 billion Cash War Chest from an expected market cap of $28.2 billion, and the mobility, e-commerce, and financial services company is on track for an enterprise value of about 10 times sales , based on a 2022 revenue forecast of $2.4 billion by Bloomberg Intelligence analyst Nathan Naidu. In comparison, e-commerce competitors like Alibaba Group Holding Ltd. and sea ltd averages 2.6 times, while ridesharing and delivery companies like Grab Holdings Ltd. and Uber Technologies Inc. are around 2.5x.

It’s worth looking at the circumstances behind such an optimistic price. GoTo is a local hero who ushers in a new era for the sprawling archipelago of 17,000 islands. Indonesia’s 273 million residents are mostly young, increasingly connected, and eager to use the convenience economy on their smartphones. Following its listing in Jakarta, GoTo will be the country’s fourth-largest public company, behind two banks and a state-owned telecom company. But only about 4% of its stock is on sale, with employees, drivers, dealers, and app users all invited to participate in the stock sale — a smart way to drive demand while rewarding key stakeholders. In the end, the IPO cost 338 rupiah. That’s above the midpoint of GoTo’s target range of 316 rupiah to 346 rupiah, but certainly not a home run. More importantly, the issue size has been reduced to 40.6 billion primary shares, short of the 48 billion originally planned. Still, it’s impressive that GoTo President Patrick Cao and CEO Andre Soelistyo were even able to pull off an IPO. Singapore-based rivals Grab and Sea have suffered massive sell-offs in recent months as investors reassess their growth potential amid mounting losses. Russia’s invasion of Ukraine has further clouded prospects for a global economy marred by supply shortages and high inflation, while a fractured relationship between China and the West shows globalization is on the retreat.

Like all companies in the mobility business, GoTo has been hit by Covid-19. After more than doubling to 7.5 trillion rupiah (US$522 million) in one year, gross revenue from on-demand services stagnated in 2020. Growth of 22% in the first seven months of 2021 was encouraging as it includes in part the impact of Indonesia’s social policies – distancing restrictions imposed in early July to deal with a deadly wave of Delta infections. However, without the $90 million e-commerce revenue cushion, adjusted Ebitda(1) would have posted a larger loss than the $340 million reported in the IPO prospectus for the same period. Financial technology services — the third pillar — brought in 73% higher transaction volumes compared to the same period last year, but a smaller fraction of that was converted into revenue.

GoTo’s battle is to convince investors that its business model is fundamentally different from Grab, which sports a similar green logo and has been its closest rival from the start. Gojek co-founder Nadiem Makarim and Grab co-founder Anthony Tan were friends at Harvard Business School. Both began ride-hailing, with the aim of turning their platforms into Southeast Asian versions of China’s WeChat — superapps offering a wide range of services.

GoTo’s suggestion is similar. Unlike its global competitors, the company has a multi-purpose fleet capable of delivering groceries, people and e-commerce products in a single vehicle. (Grab says it also shares a common fleet.) But there are important differences. For one, the logistics of a single transaction may not be sufficient to sustain earnings. So the Jakarta-based company is banking on a user brought onto its superapp for dinner to stay there to book a ride around the city or buy products online for home delivery. And once customers get used to the idea of ​​paying for everything online, they could be persuaded to try new offers through their GoPay digital wallets.

The ultimate prize is purchase and payment data, which would help apps assess customers’ creditworthiness and offer third-party financial services, including loans. Globally, however, e-commerce platforms like Latin America’s MercadoLibre Inc. and Alibaba’s Taobao in China have found greater success with financial services than ride-sharing services like Uber or Lyft Inc.

GoTo’s argument is that integrating Tokopedia’s e-commerce into its Gojek fleet allows better insights into behavior to correctly price credit to consumers and merchants. Investors who subscribe to this thesis might decide that their fintech business alone is worth paying higher multiples than Grab or Sea, as well as an online payments company like India’s Paytm, whose shares have plummeted since last year’s disastrous IPO 71% fell. While both Grab and Sea have obtained virtual banking licenses in Singapore, the city-state’s mature financial services market is more competitive than GoTo’s home territory of Indonesia.

On the other hand, the little things might not matter that much. Investors looking to invest in macro themes have few options as attractive as Indonesia. Adjusted for inflation, Southeast Asia’s largest economy is just about back to pre-pandemic levels, but it’s picking up speed – the tourist hub of Bali has reopened. Also, in a world of rising energy and food prices, the coal and palm oil exporting nation will enjoy better trading terms with the rest of the world. If this helps sustain the rupiah’s 15% appreciation over the past two years – the biggest gain of any Asian currency against the dollar – local purchasing power will get a boost. Add to that Indonesia’s rapid digitization and GoTo recordings topping the list of investors. As long as management controls the cash burn and doesn’t run afoul of regulators, growth can continue and eventually yield stable profits. Whether this package of future gains justifies paying a large premium now is a question of risk tolerance.

More from the Bloomberg Opinion:

• Money out as Southeast Asian giants rise en masse: Mukherjee & Culpan

• Tech companies found a way out of China: Tim Culpan

• Indonesia puts authoritarian rule behind it, right?: Daniel Moss

(Corrects seventh paragraph to clarify nature of Grab’s fleet.)

(1) Earnings before interest, taxes, depreciation and amortization.

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Opinion. He lives in Taipei and writes about Asian and global companies and trends. He previously covered the Beat on Bloomberg News.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrials and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

For more stories like this, visit bloomberg.com/opinion

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