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What should we think of Instacart stock after its turbulent IPO?

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  • After initial success, Instacart’s IPO ultimately turned out to be a relative “flop”

  • The stock opened up more than 40% on the day of its IPO, but reversed its gains the next day

  • Instacart faces strong competition in a low-margin environment, among other challenges

Grocery delivery and pickup specialist Instacart (Maplebear Inc.) (NASDAQ:) made headlines this week with its rocky IPO. Indeed, after gaining +43% at the opening on Tuesday, the day of the IPO, the stock ended its first day with a much more limited gain of 12%.

Wednesday then saw a correction, with Instacart stock closing down 10.68% at $30.10, barely 10 cents above the IPO price.

In this analysis, we will therefore attempt to identify the reasons for this mixed market reception, without forgetting to present all the relevant details regarding the history, strategy and finances of the company.

A valuation divided by 4 since the peak of the pandemic

The first thing to note about Instacart is that its IPO valuation of around $10 billion is almost 4 times lower than its peak valuation of $39 billion reached at the height of the COVID pandemic. -19 in 2020.

This sharp drop in the company’s value in recent years can be explained by several factors, including the fact that the peak valuation of $39 billion in 2020 was undoubtedly inflated due to the exceptional circumstances of the pandemic, the demand for grocery delivery soared as consumers sought alternatives to in-store shopping, which is no longer the case today.

We can also blame the rise in competition, with Instacart facing in particular DoorDash and Uber (NYSE:), which also offer food delivery services. Additionally, the company faces other delivery services operating under a different model, like Shipt, as well as meal kit providers like Blue Apron, and restaurant services like Postmates. The competitive landscape is difficult, and maintaining market share is becoming increasingly difficult, which is reflected in valuation.

Many analysts raised this competition problem in their first opinions on the company.

Needham issued a neutral rating on Instacart shares, for example, citing concerns about growing competition and a potential slowdown in online grocery sales growth.

Gene Munster, managing partner at Deepwater Asset Management, also expressed skepticism about Instacart’s growth prospects, particularly compared to companies like Uber.

Deciphering Instacart’s business model

Understanding how Instacart generates revenue is also essential to evaluating its investment potential. Instacart’s main sources of revenue are:

  • Shipping cost : Instacart charges customers a delivery fee for grocery and pickup orders. The fee structure varies, with orders over $35 incurring a $5.99 delivery fee, while orders under $35 cost $7.99 for delivery, with a minimum order threshold of $10. Fees may increase for customers who want faster delivery or during peak periods.

  • Subscription Services: Instacart offers subscription services to its customers. These include an annual membership priced at $99 or a monthly service fee of $9.99. Subscribers enjoy benefits such as delivery fee waivers under certain conditions, reduced service fees, and flexible pricing structures during peak hours. The subscription model allows the company to not only generate consistent revenue but also cultivate customer loyalty.

  • Advertising revenue: Instacart leverages its platform to generate revenue through advertising. Brands can advertise products to the platform’s monthly active users, and this ad revenue reached $740 million in 2022, marking a 29% year-over-year increase. Advertising accounts for 29% of Instacart’s total revenue, underscoring its importance to the company’s business model.

  • Retail Partnerships: Instacart serves as a technology partner to more than 1,400 retailers, covering 85% of the U.S. grocery market. This includes collaborations with major brands such as Kroger, Costco and Albertsons. These partnerships contribute to the company’s revenue by providing retailers with a platform to effectively reach customers.

Instacart’s financial performance

Another fundamental aspect of evaluating Instacart’s investment potential is obviously its financial performance.

According to Instacart’s S-1 filing ahead of its IPO, Instacart reported net income of $428 million in 2022, a remarkable turnaround from its 2021 loss of $74 million.

CART benefits

CART benefits

Source : InvestingPro

The company also recorded a 39% increase in revenue, generating $2.55 billion in 2022.

CART income

CART income

Source: InvestingPro

Instacart also highlighted its commitment to “profitable growth” in its IPO prospectus, highlighting consecutive quarters of profitability leading up to the IPO. It remains to be seen whether this can continue over time despite the challenges…

Conclusion

Instacart’s IPO attracted the attention of investors, but its results are mixed to say the least over its first two days of existence on the stock market. Although the company has demonstrated profitability and growth in recent quarters, its valuation has fallen sharply since the peaks reached during the 2020 pandemic. The company also faces an increasingly difficult competitive landscape, evolving consumer preferences and the challenges inherent to the grocery industry. Investors should therefore approach the stock with caution, and stay on the sidelines for now.

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