Instacart IPO: Grocery app to test market on Tuesday

Instacart IPO to test market appetite for new stock on Tuesday

Instacart, the San Francisco-based delivery app platform, is preparing for its initial public offering (IPO) on Tuesday, which could potentially value the company at approximately $9.6 billion. Similar to the recent IPO of UK-based chip designer Arm Holdings, Instacart's offering serves as an indicator of investor interest in new stock offerings for the upcoming fall season.

Instacart set the price range for its shares at $28 to $30 in a regulatory filing Friday, as per a CNBC report.

This valuation reflects a change in market dynamics compared to its self-assessment of $24 billion in March 2022 — down from a significantly higher valuation of $39 billion established during a late-stage venture capital round in 2021.

The price that stock investors are willing to pay for Instacart shares will be influenced in part by their confidence in the gig economy's expansion and profitability. Major players like Walmart (WMT), Amazon.com (AMZN), Uber Technologies (UBER), and DoorDash (DASH) are all vying for a larger share of the online grocery-buying market.

What is Instacart?

Founded in 2012 and incorporated as Maplebear Inc., Instacart is now set to join a cohort of gig economy companies in the public market. This move follows the earlier IPOs of Airbnb and DoorDash in 2020, as well as ride-sharing firms Uber and Lyft the year before. Notably, among these companies, only Airbnb is currently trading above its IPO price.

Instacart dispatches personal shoppers to grocery stores on behalf of its clients, who use a mobile app to make their grocery selections and place their orders. The company’s services are available in more than 5,500 cities, serving over 40,000 grocers and other retail stores, as stated on its website. The firm experienced significant growth during the COVID-19 pandemic, as consumers opted for home delivery to avoid public places. However, like many players in the gig economy, profitability has consistently posed a significant challenge for Instacart, due to the high costs associated with compensating a large pool of contractors.

Instacart reported that its workforce headcount peaked in Q2 2022 and subsequently decreased over the following two quarters. This reduction in personnel contributed to a decrease in the company's fixed operating costs. As of the end of June, Instacart had 3,486 full-time employees.

Analysts at Evercore note that Instacart currently holds approximately 22% of the $132 billion U.S. online grocery-delivery market. However, increased grocery prices have had an impact on demand. In the first half of 2023, the company processed a total of 132.9 million customer orders, a slight increase from the 132.3 million orders during the same period the previous year.

Instacart IPO: A look at the firm’s key numbers ahead of the Tuesday listing

In the previous year, Instacart generated $2.55 billion in revenue, marking a 39% year-on-year (YoY) increase. The revenue primarily came from fees charged to both retailers and customers, including those enrolled in its premium membership program, Instacart+.

According to the company's prospectus, it reported a net income of $114 million, with the latest quarter's revenue reaching $716 million, marking a 15% increase compared to the same period in the previous year. Instacart has achieved profitability for five consecutive quarters, as indicated in the regulatory filing on Friday.

PepsiCo has committed to purchasing $175 million worth of the company's stock through a private placement.

Instacart has also expressed its interest in continuing to integrate artificial intelligence (AI) and machine learning features into its platform. In May, Instacart unveiled "Ask Instacart," a search tool designed to respond to customers' inquiries about grocery shopping, highlighting the company's engagement with the burgeoning field of generative AI.

“We believe the future of grocery won’t be about choosing between shopping online and in-store,” CEO Fidji Simo wrote in the company’s prospectus ahead of the Instacart IPO. “Most of us are going to do both. So we want to create a truly omni-channel experience that brings the best of the online shopping experience to physical stores, and vice versa.”

Analysts highlight Instacart's evolving business model as a promising indicator of future growth. Approximately 30% of Instacart's revenue in the previous year, totaling around $740 million, was derived from advertising. Instacart reports a 29% growth in this particular segment between 2021 and 2022. As noted by Ali Mogharabi, senior equity analyst at Morningstar, "The platform has experienced significant expansion."

Furthermore, Instacart has “all of this consumer shopping data that they’re able to sell,”says Alex Frederick, a senior analyst specializing in emerging technology at PitchBook. The collected data is “really powerful and really attractive,” the analyst adds. While the grocery sector is known for its relatively low margins, advertising and software offerings command significantly higher profits.

Despite the relatively modest profit margins, online grocery sales have maintained their strength even in the post-COVID-19 pandemic era. In the long term, Frederick anticipates continued growth in the market. “Instacart is very well positioned” to capitalize on these opportunities, Frederick adds.

The upcoming Instacart listing makes the firm one of the first independent grocery delivery firms to launch its IPO, as Amazon Fresh, Walmart Grocery, and Google Express operate under the umbrellas of major corporations. Shipt, one of the firm’s rivals, was purchased by Target (TGT) in 2017, and Fresh Direct, another direct-to-consumer grocery delivery company, was acquired by the global food retailer Ahold Delhaize in 2021.

After the Instacart listing, marketing automation firm Klaviyo is scheduled to set the price for its own IPO at roughly $25 to $27 per share this week, with the goal of achieving a valuation of around $8 billion.

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