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GoTo: Growing in An Intense Competitive Landscape (Repost)

Investment Thesis

GoTo has faced intense competition from other players, such as Shopee and Grab. To stay competitive, GoTo is likely to remain aggressive in its promotional activities at the expense of massive operational expenditures. Based on the offering price, GoTo’s EV/Sales is much higher than its international peers. Therefore, investing in GoTo might be suitable for those with higher risk tolerance.


Here’s What You Need to Know

After Bukalapak (IDX: BUKA) raised trillions of rupiah last year, another Indonesia tech giant, PT GoTo Gojek Tokopedia Tbk is also open to the public, hoping to raise Rp16.4-Rp18 trillion through the initial public offering. Please find the relevant information about the IPO in Figure 1 below.


The company will utilize the IPO proceeds for working capital needs, including but not limited to customer acquisition, sales and marketing, product development, and operational expenses. Below is the proceeds allocation to Tokopedia, PT Dompet Anak Bangsa (DAB), PT Multifinance Anak Bangsa (MAB), Velox Digital Singapore Pte. Ltd (VDIGI SG Ltd.), and Go Viet Ltd.












Additionally, it is essential to note that the Greenshoe option will allow the company to issue up to 7.8 billion Series A additional shares from its treasury shares between the listing date and 30 days since the listing date. The so-called stabilizing agent (Agen Stabilisasi) will buy the shares only if the share declines to below the offering price.


Another thing to mention is that the Multiple Voting Shares right stipulates every pre-IPO Series A shareholders (one vote per share) to retain their share ownership for eight months since the effective date. It will take two years for Series B shareholders (40 votes per share). In addition, the company plans to execute its rights issue by issuing a maximum of 119.6 billion new shares two years after the listing date.


Not Short of Suitors

GoTo has attracted numerous prominent enterprises to invest millions of dollars into the company. For example, Abu Dhabi Investment Authority (ADIA) led the pack during the pre-IPO funding with US$400 million. In addition, other well-known global enterprises, such as Alibaba Group (NYSE: BABA), PayPal (NASDAQ: PYPL), and Visa (NYSE: V), are on the list. Indonesia’s giants, such as PT Astra International Tbk (IDX: ASII) and Telkomsel, a subsidiary of PT Telkom Indonesia Tbk (IDX: TLKM), are also on-board.


Figure 3 shows GoTo’s shares ownership structure.


















GoTo owns a portion of other publicly-listed companies, such as PT Matahari Putra Prima Tbk (IDX: MPPA), PT Bank Jago Tbk (IDX: ARTO), PT Net Visi Media Tbk (IDX: NETV), and international associates, such as JD.com and Onstar Express Pte. Ltd., notably known as a parent company of SiCepat Express, that have invested in PT Logitek Digital Nusantara, a subsidiary of PT Telefast Indonesia Tbk (IDX: TFAS).


An Integrated Ecosystem

To cater to all of its consumers’ needs, GoTo creates an integrated ecosystem that complements each of the main segments, which includes on-demand service (Gojek), E-commerce (Tokopedia), and financial technology (GoTo Financial). For example, one can utilize the GoPayLater, a postpaid payment method, to buy goods on Tokopedia. Next, the merchant can deliver the goods to the buyer through GoKilat (one of Gojek’s services). Finally, the buyer will receive a bonus credit sent to GoPay wallet for the next transaction on Tokopedia.


















What segment has the most significant contribution to GoTo’s revenue? Figure 5 shows that the on-demand service contributed more than three-fourths to GoTo’s top-line, while its financial technology (fintech) service’s contribution hovered between 11% and 15%. However, it was not until 2021 that GoTo started to recognize the revenue from E-commerce after merging with Tokopedia in May 2021.
















GoTo’s revenue growth recovered to 41% as of July last year, thanks to the merger with Tokopedia. At the same time, on-demand service growth has not yet returned to its pre-pandemic levels.











The following section will discuss the industry’s potential and the competition in each market.


On-demand Service: Tough Challenge from Grab

The on-demand segment offers three different services: mobility, food delivery, and logistics. Mobility includes the ride-hailing service and Logistics offers, for example, Go-Kilat service, the same-day delivery service on Tokopedia. We present in Figure 7 how GoTo recognizes its on-demand service revenue.











The on-demand market’s potential remains enormous. RedSeer, a consultancy, estimates Indonesia’s on-demand market to grow from US$5.4 billion to US$18 billion (2020-2025), implying a 27.2% CAGR. In addition, Figure 8 shows estimates for mobility and food delivery GTV.































But the competition in the market has been tough for a while. Grab (NASDAQ: GRAB) has become a tough competitor in the mobility service. For example, Measurable AI, an alternative data provider, indicates that Grab owned two-thirds of the total revenue in car rides between Grab and Gojek (excluding February 2021), while Gojek finally gained traction in motorbike rides in the back half of 2021.


Moreover, in the online food delivery service, GoFood (Gojek’s service) is relentlessly challenged by GrabFood and ShopeeFood, a service from Shopee–part of Sea Limited (NYSE: SE). According to Momentum Works, Grab had a slight edge over GoFood with 49% and 43% of market share, respectively, while ShopeeFood held 8%. But, until a few years ago, GoFood had 90% of the share.


Indeed, Indonesia’s annual foodservice consumption per capita in 2019 grew 7.4 times as high as the figure in 1998. And increasing access to digital payments is likely to drive the market growth further.


Yet, more players are entering the industry, enticed by the market’s potential. Therefore, to gain market share (in the on-demand market), they utilize promotions, such as cashback and discounts, which, unfortunately, hard-hit their financials.

For instance, GoTo mentioned that it will continue its promotional activities to “stay competitive in certain markets” at the expense of its financials. Additionally, it acknowledged that revenues gained from those promotions might not be sufficient to cover the rising marketing costs. To put it into context, GoTo reported Rp7.5 trillion of revenue from the on-demand service in 2020, only to be partially eclipsed by almost Rp5 trillion of promotions.




































Despite the astronomical promotion costs, however, Gojek’s consumers are loyal. Research by LD FEB UI, a think tank, suggests that of 4,199 respondents surveyed in September 2020, 94% of them plan to remain using Gojek and not use other apps and 96% of them recommended Gojek to their relatives and friends. Another research by the think tank indicates that of more than 8,500 consumers across 21 cities, 86% will continue to use Gojek services without promotions.


Better apps’ service and security might be the key to consumer loyalty. For example, 90% of the respondents answered that they had better experience with Gojek’s services than the other digital applications. In addition, 93% believed that Gojek’s security is better than the industry’s standard.

















In conclusion, the market is growing, but the competition is fierce, without any significant advantage over others. And new players, such as ShopeeFood, will continue to challenge the incumbents. As a result, to maintain competitiveness, players are likely to spend massive operational expenses. Still, we see that the market concentration is high in the on-demand market in Indonesia.


Tokopedia: Amid a More Fragmented Market

The e-commerce market in Indonesia is growing. RedSeer estimates the total e-commerce market GTV to reach US$137.5 billion in 2025 from US$44.6 billion in 2020 (25.3% CAGR), fueled by increasing e-commerce penetration as a percentage of an individual’s consumption.


Moreover, through the report titled “e-Conomy SEA 2021: Roaring 20s: The SEA Digital Decade,” Bain & Company estimates total e-commerce GMV in Indonesia to reach US$104 billion, up from US$35 billion in 2020. No wonder players are interested in entering the market.


Unlike the on-demand service market, where market concentration is high, the e-commerce market in Indonesia is more fragmented. Many players are in the industry, such as Tokopedia and Shopee, Blibli, JD ID, Orami, Bhinneka, Sociolla, and Zalora, each with different customer segmentation, in our view.































Tokopedia and Shopee are the market leaders. Momentum Works’ findings imply that Shopee led the market in 2020 with a 37% market share in GMV, closely followed by Tokopedia with 35%. Lazada and Bukalapak (IDX: BUKA) sat third and fourth place with 11% and 7%, respectively.

















But that was not the case a few years ago. Shopee was launched in 2015, while Tokopedia was founded as early as 2009. In just a few years, Shopee overtook local players in GMV, such as Lazada and Tokopedia.


Ipsos, a market research firm, found that in a survey with 1,000 respondents, Shopee led the race of four different categories (brand used most often, top of mind, consumer penetration, and transaction value). Furthermore, we found that the Shopee app is the number 1 shopping app on the App store, with Tokopedia closely behind.














Shopee proves itself to be a formidable competitor with its aggressive promotional activities. For example, Shopee regularly holds promotional campaigns to offer products with reduced prices and cashback credited to ShopeePay, an e-wallet similar to GoPay. As a result, during the 9.9 Super Shopping Day campaign, it claimed to have sold 1.8 million products in just one minute in the first two hours. In addition, Shopee saw its online visits increase six times as many as daily visits during the 12.12 birthday sale campaign. Meanwhile, Tokopedia regularly offers its consumers cashback vouchers.


















On top of that, Tokopedia’s business remains unprofitable, exacerbated by promotions, advertising, and marketing expenses. In perspective, Tokopedia reported consolidated gross revenue of Rp3.5 trillion in 2020. Promotions, however, reached Rp1.7 trillion, while advertisement and marketing cost Tokopedia a whopping Rp2.2 trillion.































The story is similar to the on-demand service business: strong industry growth but intensifying competition (albeit a more fragmented market in the E-commerce landscape). As a result, maintaining high growth to achieve better economies of scale while reducing promotions, advertising, and marketing are no easy feat. Therefore, turning the business into a profitable one might still take time.


Financial Technology: Narrowing Gap Among Others

On the other hand, the gap in market share between digital wallet players is narrow. For example, Bank Indonesia noted that OVO held 20% of the market share in 2019. GoPay tied with PT Bank Mandiri Tbk (IDX: BMRI) with 19%. Others were not far behind either. In addition, a survey by Snapcart indicates that ShopeePay was the most used application between September and December 2020. Results might differ, but the idea remains the same: the competition is fierce.


To assume that an integrated ecosystem between GoPay and Gojek/Tokopedia will provide any significant advantage might not be entirely correct, for Grab has OVO and Shopee owns ShopeePay.


 

Valuation

Based on an offering price between Rp316 and Rp346 per share, GoTo’s trailing-twelve-month EV/Sales stands at 83x and 91x, respectively. The multiple is far higher than its international peers, such as Amazon (NASDAQ: AMZN), Alibaba (NYSE: BABA), Sea Limited, and Grab. Indeed, GoTo’s business model is not similar to the peers we previously mentioned. Moreover, at US$26-29 billion of market cap (based on offering price), GoTo is more comparable to SE and GRAB than AMZN and BABA. But we will go through it for the sake of the comparison.





















However, when valuing a company with high growth, we should also consider its future growth. Below is our rough estimate of GoTo’s revenues, with our simple assumptions, yet still reasonable, in our view.


Assumptions

  • We annualized the 9M21 results to arrive at 2021F GTV figures.
  • We use RedSeer’s estimates for each market (on-demand service at 27.2% CAGR; e-commerce at 25.3%; and financial technology at 33.5%, an average among consumer payment, merchant payment, and financial service growth rates). Next, we discounted the estimated growth rates by 10% to avoid over-bullishness.
  • We assume take rates will be unchanged from the figure in 9M21, and we use those take rates to estimate gross revenues from 2021 onwards.
  • An exception is for Tokopedia’s estimated revenue, derived from an annualized 9M21 figure, because GoTo only started to record Tokopedia’s revenue from 17 May 2021.
  • We assume the promotions as a percentage of revenue rates are the same between 7M21 and 2021F, and rates decline by 2% for the on-demand service, 1% for e-commerce, and 0.5% for financial technology service per year, reflecting the competition in each market.
























































As a result, at the current offering price, GoTo’s EV/Sales multiple will start to make sense after we incorporate future growth until 2025 (assuming the number of shares outstanding is unchanged). However, it remains higher than its international peers. And a premium implies a risky share.

















Investment Risks

Intense competition with a medium barrier to entry
We notice that GoTo has lost market share after facing competition from other players, such as Grab and Shopee, in the on-demand service and e-commerce markets. With enticing potential growth ahead, Indonesia has a lot to offer in the long run. However, big players might be interested in entering the market, possibly intensifying the competition. Yet, new players will need to spend an enormous investment to be competitive.


Further operating losses and negative free cash flows
GoTo’s business has not been profitable since its inception, attributing such losses, for example, to operational activities, selling and marketing, and salaries expenses. Therefore, significantly reducing its promotional activities will reduce GoTo’s competitiveness in the market, in our view. Moreover, the company could not guarantee that it would reach profitability, and it has been generating negative free cash flows.


 

Final Thoughts

The main story is that GoTo has enjoyed strong growth in developing markets. But fierce competition in the last few years from other big players took market share from GoTo. Moreover, GoTo spent trillions of rupiah for marketing and promotional expenses to stay competitive, resulting in consecutive operating losses. In the foreseeable future, the trend is likely to persist, in our view.


Since its inception, GoTo has a growth company’s characteristics: strong revenue growth and no dividends. Cited in the prospectus, GoTo will start paying dividends only if its accumulated retained earnings turn positive. Still, valuation-wise, the offering price is a premium compared to the company’s international peers, even after we incorporate future growth.

Therefore, investing in GoTo is risky, in our view, as competition from existing and possibly new players could jeopardize our estimates of GoTo’s future growth. Therefore, GoTo might be suitable for those with higher risk tolerance.
















































































Picture source: Photo by PhotoMIX Company from Pexels


Disclosure
The writer did not submit a bid for the stock mentioned


Disclaimer
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