Why Grab Stock Is Sinking Today

Key Points

• Grab reported its first-ever profitable quarter.

• However, its full-year guidance didn't live up to analysts' expectations.

• Ultimately, Grab's profitability should continue improving thanks to a booming advertising business.

• 10 stocks we like better than Grab ›

Shares of leading Southeast Asia delivery and ride-hailing juggernaut Grab (NASDAQ: GRAB) sank 6% as of 3 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.

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Grab reported second-quarter earnings, where revenue rose 23% and the company reported its first-ever profitable quarter.

Despite sales exceeding analysts' hopes, and earnings meeting them, Grab's guidance fell short of expectations, prompting the move downward.

Shifting to profitability

Grab offers mobility, delivery, and financial services to more than 46 million monthly transacting users (MTUs) in eight countries across Southeast Asia.

This MTU count grew by 13% in Q2, helping guide the company to better-than-expected sales growth. At the business segment level, Grab saw sales for deliveries (groceries, packages, food orders, and more) grow by 23%, its mobility unit (ride hailing) increase by 19%, and its financial services balloon 41%.

Image source: Getty Images.

However, the business area that might have helped the company deliver its first profitable quarter was its burgeoning advertising business. Whether it is selling ad space to restaurants jockeying for increased visibility on a search or companies buying ad space for a customer to see while waiting on a ride, these ad sales bring high margins to Grab.

Now reaching a $236 million annualized run rate, these ads equal 1.7% of the delivery unit's gross merchandise value, up from 1.4% last quarter. Better yet, the number of self-serve advertisers on Grab's app grew by 31%, highlighting the attractive value proposition the service provides to restaurants of all sizes.

Quickly growing, now profitable, and armed with a net cash balance north of $5 billion to spend on tuck-in acquisitions or put back into the business for further growth, Grab looks like a promising growth stock trading at 7 times sales.

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool recommends Grab. The Motley Fool has a disclosure policy.