The Instacart IPO is anticipated to occur in September 2023, with recent reports pinpointing September 19 as the likely date. Although it is expected to be one of the largest IPOs of the year, the valuation of the grocery-delivery business has diminished significantly to $9.3 billion, which is less than a quarter of its initial intended value.
The pivotal moment in Instacart’s journey towards the IPO occurred on August 25 when the company submitted its S-1 filing to the Securities and Exchange Commission (SEC). This marked the first decisive step toward the IPO. Within the filing, it was disclosed that beverage and snack giant PepsiCo had committed to investing $175 million in the company’s Series A preferred stock. Additionally, prominent investors such as Norges Bank Investment Management, along with venture capital firms TCV, Sequoia Capital, D1 Capital Partners, and Valiant Capital Management, have committed to participating as cornerstone investors.
It’s worth noting that Instacart had initially filed with the SEC on May 11, 2021, intending to go public. However, the IPO was repeatedly postponed due to the fluctuations and volatility in the market.
Instacart is an American technology company that operates as an online grocery delivery and pick-up service. Founded in 2012 by Apoorva Mehta, Max Mullen, and Brandon Leonardo, the company has rapidly grown to become one of the leading players in the online grocery shopping and delivery industry. As of my last knowledge update in September 2021, here is some key information about Instacart:
Business Model: Instacart’s primary business model is to connect customers with personal shoppers who pick up and deliver groceries from local supermarkets and retailers. Customers can place orders through the Instacart app or website, and the company’s shoppers fulfil these orders and deliver them to the customers’ doorstep.
Services: Instacart offers a range of services, including same-day grocery delivery, next-day delivery, and the option for customers to schedule their deliveries. It partners with a variety of grocery store chains and retailers, allowing customers to shop from their preferred stores.
Funding and Valuation: Instacart had raised significant funding through various rounds of financing, including venture capital investments.
Competition: Instacart faces competition from other online grocery delivery services like Amazon Fresh, Walmart Grocery, and grocery store chains that offer their delivery services. The grocery delivery industry is highly competitive, with several players vying for market share.
Business Partnerships: Instacart has formed partnerships with a wide range of retailers and grocery store chains, including but not limited to Costco, Kroger, Safeway, Publix, and Target, to offer their products through the platform.
Instacart’s revenue model
Instacart generates revenue primarily through delivery fees assessed on each grocery and pick-up order. For orders exceeding $35, customers are charged $5.99 for delivery, while orders below $35 incur a $7.99 delivery fee, with a minimum purchase requirement of $10. Fees may be adjusted higher for customers seeking expedited delivery or selecting busier time slots. Moreover, Instacart offers advertising space for brands to promote their products on its platform.
Furthermore, customers have the option to subscribe to an annual membership priced at $99 or a monthly service available at $9.99. Subscribers receive various benefits, including waived delivery fees under certain conditions, reduced service fees, and more flexible pricing during peak hours. In its S-1 filing, Instacart disclosed that it had processed a total of 263 million orders, amounting to $29.4 billion in gross transaction value (GTV) in 2022. This represents an 80% year-over-year increase from 2018 to 2022.
Instacart also derives revenue from advertising, allowing brands to promote their products to the platform’s monthly active users. Advertising revenue reached $740 million in 2022, reflecting a 29% year-on-year growth. This particular revenue stream accounts for 29% of the company’s overall revenue.
Strength and Risks
Instacart’s potential IPO in 2023 possesses several strengths that could make it an attractive investment opportunity:
- Market Leadership: Instacart has established itself as a dominant player in the online grocery delivery industry, enjoying widespread recognition and a substantial market share.
- Strong Growth Trajectory: The company has experienced remarkable growth, with its grocery sales surging and revenue increasing significantly year-over-year.
- Partnerships: Instacart has forged partnerships with major grocery store chains and retailers, broadening its product offerings and customer base.
- Technological Advancements: The company’s investments in technology have improved the user experience and order fulfilment, making it more competitive in the e-commerce space.
- Data Insights: Instacart has access to valuable consumer data, enabling targeted advertising and informed decision-making.
- Experienced Leadership: Instacart is led by an experienced and innovative management team capable of navigating the complexities of the industry.
- Profitability Potential: The company’s efforts to enhance profitability through digital advertising and other strategies indicate a path to sustainable financial success.
While the IPO landscape can be volatile with Instacart strengths and its alignment with evolving consumer preferences in the e-commerce and grocery sectors make it an IPO worth considering for investors seeking exposure to this growing market.
- Market Competition: The online grocery delivery sector is fiercely competitive, with major players like Amazon, Walmart, and traditional grocery chains entering the market. Instacart faced the risk of losing market share to these deep-pocketed competitors.
- Profitability Concerns: While Instacart’s revenue had surged during the pandemic, the company had yet to turn a profit. The pressure to achieve profitability could lead to cost-cutting measures that might affect service quality.
- Dependence on Retail Partners: Instacart’s success relied heavily on its partnerships with grocery store chains. Any changes or terminations in these partnerships could have a significant impact on its business.
- Regulatory Challenges: The gig economy model used by Instacart for its shoppers could face regulatory scrutiny, potentially leading to changes in labour laws that could increase operating costs.
- Market Volatility: IPOs can be volatile, with share prices subject to rapid fluctuations. Investors risk potential losses if the stock price does not perform as expected.
- Dependency on Tech Infrastructure: Instacart’s success relied on a robust technology infrastructure. Any disruptions, cyberattacks, or technical glitches could disrupt operations and erode customer trust.
- Valuation Risk: The valuation assigned to Instacart in the IPO might not accurately reflect its future growth prospects, potentially leading to overvaluation and subsequent share price corrections.
Advantages of the Instacart IPO
“If you hold the belief that grocery delivery services like Instacart will play a pivotal role in the future of online shopping, there are compelling arguments that provide context for the company’s recent challenges.
In 2019, Instacart accounted for just under 11% of e-commerce grocery sales, as reported by eMarketer. In the following year, this market share doubled to almost 22%. This substantial expansion in the market share contributed significantly to Instacart’s remarkable growth in grocery sales, which escalated from $7 billion in 2019 to over $23 billion in 2020, resulting in $1.5 billion in revenue for the company.
The narrative is now quite familiar: The onset of social distancing measures and concerns related to Covid-19 triggered substantial shifts in the shopping behaviours of many Americans. They transitioned from physically navigating the aisles of local stores to conveniently ordering groceries through their mobile devices, delivered right to their doorstep.
While the pandemic acted as a turbocharger for Instacart’s business, it’s essential to note that the company had already experienced a decade of consistent growth. Throughout the 2010s, Instacart’s sales steadily climbed, and from approximately $735 million in 2019, they surged to $1.8 billion in 2021, according to estimates from Microsoft’s Business of Apps.
Nevertheless, Instacart is not solely fixated on the domain of grocery delivery. Its success is rooted in enhancing the shopping experience through technology, a mission that could propel the company into highly profitable new avenues.
Amazon, for instance, has initiated the integration of technology into Whole Foods Market stores, enabling its Amazon Prime customers to seamlessly select items and exit the store, with automatic billing. However, few retailers possess the technological expertise needed to develop or implement such systems independently, presenting an immense opportunity for Instacart.
In late 2021, Instacart strategically acquired an artificial intelligence startup named Caper AI, showcasing its potential to expand its business by providing shopping technology solutions to other retail companies. Caper AI is actively developing a “smart” shopping cart equipped with computer vision and AI capabilities. This innovative cart can identify products as they are added, automatically charging shoppers for their selections.
According to a 2021 eMarketer analyst note, advancements in fast delivery and click-and-collect capabilities are reshaping consumers’ grocery choices, placing an emphasis not only on price but also on convenience.”
Reasons to Be Cautious About the Instacart IPO
Undoubtedly, Instacart has emerged as a formidable force in e-commerce, even with its current reduced valuation. However, the critical question for prospective investors is the extent of its future growth potential.
The stock market trajectories of four other pandemic-driven success stories offer a cautionary tale:
- Doordash (DASH) experienced substantial growth in late 2021 but has since seen its shares plummet by more than 50% since November 2021 as the pandemic’s influence waned.
- Shares of Canadian e-commerce technology provider Shopify Inc. (SHOP) have tumbled nearly 60% since November 2021.
- Zoom (ZM), despite becoming synonymous with video conferencing during the pandemic, witnessed a 56% decline in its stock price over the past year.
- Peloton’s (PTON) valuation soared during the lockdowns but has since returned to its pre-pandemic trading range of $20 to $30 per share.
These market fluctuations underscore why Instacart’s leadership made the unconventional decision to lower their own company’s valuation. It also suggests that this may not be the ideal moment for the company to aggressively pursue an IPO.
All four of these examples achieved substantial gains by catering to the stay-at-home pandemic lifestyle. Presently, the market appears less enthusiastic about their post-pandemic strategies.
While there’s no guarantee that Instacart IPO will follow the same trajectory, being categorized as a pandemic-related stock in a post-pandemic world presents a unique set of challenges. Additionally, the Federal Reserve’s shift towards tighter monetary policies impacted stock markets, particularly high-flying tech firms.
Despite market stabilization, tech companies reliant on expectations of rapid growth fueled by affordable funding continue to face struggles. The Fed’s likely increase in short-term interest rates to around 2% further complicates financing for companies whose profitability may be years away.
Is Investing in the Instacart IPO a Wise Decision?
Digital grocery sales have firmly established themselves, but the key question is the extent of Instacart’s benefit. For instance, eMarketer projects Instacart’s grocery sales to reach $35 million by 2023, nearly a 50% increase from 2020. However, Instacart’s share of these sales is expected to dip from 21.5% to 20%, implying that while more people may use mobile apps to purchase groceries, they may opt for alternative platforms.
Instacart seeks to diversify revenue through digital advertising and accelerate deliveries, aiming for 15 to 30 minutes. The success of these endeavours and their impact on profitability remains uncertain.
Investing in IPOs demands caution; even if Instacart faces initial challenges, it requires the fortitude to weather the volatility. Betting on the new frontier is never straightforward.