The initial public offering market of today is not quite the same as it was in the glory days of 2021. There were 1,035 IPOs in that year and the number plummeted to 185 in 2022. So far this year, there have been only 114. One of most recognizable and anticipated IPOs this year is Instacart (CART, Financial), which went public on Sept. 19.
Instacart is a leading grocery technology company in North America that works with grocers and retailers to transform how people shop. The company partners with more than 1,400 national, regional and local retail banners to simplify online shopping, delivery and pickup services from more than 80,000 grocery stores. The company makes it possible for millions of people to get the groceries they need from retailers by a delivery service that is facilitated by approximately 600,000 Instacart shoppers that pick, pack and deliver orders on their own flexible schedule.
The Instacart Platform also offers retailers a suite of enterprise-grade technology products and services to power their e-commerce experiences, fulfill orders, digitize brick-and-mortar stores and provide advertising services. With Instacart Ads, thousands of CPG brands – from category leaders to newer brands – partner with the company to connect directly with consumers online at the point of purchase. Instacart Health also provides tools to increase nutrition security and make healthy choices easier for consumers.
Founded in 2012, the company currently has a market capitalization of $9.4 billion.
Financial review
The company’s three-year revenue growth has been impressive with revenue increasing from $1.5 billion in 2020 to $2.6 billion in 2022. For the first six months of 2023, revenue increased 31% to $1.47 billion. The company was profitable on a GAAP basis in the first six months of the year, but that is expected to be short-lived as the company will likely report massive amounts of stock compensation in the second half due to the IPO.
Instacart's orders were roughly flat in the first half compared to a year ago at 132.9 million, while the average order value rose 4% to approximately $112. The company expects higher order levels in the second half, in part due to the back-to-school period and the subsequent holiday season.
The company generated free cash flow in the first half of 2023 totaling $242 million. With capital expenditures of only $22 million, free cash flow was $220 million.
The company maintains a strong balance sheet as of June 30 with cash and investments of $1.9 billion and no traditional long-term debt. However, cash balances are expected to increase significantly as the company’s IPO occurred in the third quarter.
Valuation
The Instacart IPO was priced for a market valuation of $10 billion, which was almost 70% less than its private valuation of $39 billion in 2021 during the special purpose acquisition company and private investment boom. The current market capitalization is approximately $9.3 billion.
Analyst earnings per share estimates will not come out for another 40 days or so due to the 40-day quiet period, but if you extrapolate first-half earnings per share for the full year, 2023 earnings could be in the 50 to 60-cent range on a non-GAAP basis. If substantial growth occurs in the second half, earnings per share could approach $1. That would put the stock trading in range of 30 to 60 times 2023 earnings.
The GuruFocus discounted cash flow calculator creates a value of close to $25 when using a 15% 10-year growth rate and discount rate of 10.0%.
Guru trades
Ruane Cuniff's Sequoia Capital owned 19% of the company before the IPO and 18% after. D1 Capital Partners owned 14% of the company before the IPO and 13% after.
Summary
There is still a market for growth stocks today, as evidenced by the high valuations of Instacart. However, the business model may be challenged by grocery store partners as large players like The Kroger Co. (KR, Financial), Walmart Inc. (WMT, Financial) and Albertsons Brands Inc. (ACI, Financial) ramp up their own delivery efforts. PitchBook analyst Alex Frederick recently said,"Enthusiasm for the company will be challenged by its ability to sustain margin expansion and revenue growth while facing elevated food price inflation and increased competition from food delivery providers, Walmart, Amazon, and traditional grocers."
Chief Operating Officer Asha Sharma remains optimistic. In a statement, she said,“We’ve long believed the future of grocery – and commerce in general – isn’t online or in-store, it’s both. And now, more than ever, it’s being supercharged with AI. We know that omnichannel customers in particular are more valuable to retailers, which is why Instacart is developing more solutions that help retailers serve their customers no matter how they shop. And, good data is the foundation for good AI solutions for retailers. Our operational advantage is built around our dynamic grocery catalog – which is one of the largest in the industry and includes 1.4 billion items and more than 6,000 item updates per second – paired with more than a decade of knowledge about how people shop for groceries online.”
However, the overall market may also be less than investors think as the addressable market for the lazy, elderly and anti-social types may not be enough to sustain the business model. Investors may be best to wait for Instacart to turn into “busted IPO” as the stock drifts under $20 per share.
