After a long drought of notable initial public offerings (IPOs), investors are set to get a long-anticipated listing next week.
Instacart recently priced its IPO, with shares expected to start selling between $26 and $28, and the online grocery marketplace is expected to begin trading those shares next week. At that price, the company would be worth $9.3 billion fully diluted, well below the $39 billion it was valued at back in 2021.
Instacart's S-1 prospectus portrayed a company that has massive market potential in the largest retail segment and one that is also experiencing a transition as the pandemic nears an end.
Instacart's revenue soared during the pandemic, jumping nearly 7x from $214 million annually prior to the pandemic to $1.48 billion in 2020, with gross transactions value quadrupling from $5.1 billion in 2019 to $20.7 billion in 2020. And the company has succeeded in maintaining those revenue rates and adding to them, with revenue up 39% to $2.55 billion in 2022, and up 31% for the first six months of 2023 to $1.48 billion.
Its dialed-down valuation seems to show a lack of demand for its shares, but it's a mistake to write off the online grocery marketplace. In fact, e-commerce investors will recognize a few familiar patterns with Instacart which could drive its growth in the coming years.
Image source: Getty Images.
The Shopify of groceries?
Shopify (SHOP 2.52%) has been one of the top-performing stocks since its IPO, thanks to its blowout revenue growth. Shopify has disrupted the e-commerce space by providing an easy-to-use online platform that any online seller of any size can use to power its business. It now has more than 1 million merchants on its platform, including Fortune 500 companies and mom-and-pop sellers.
Instacart seems to be following a similar model to Shopify, focused on groceries as it pursues industry with an addressable market of $1.1 trillion in the United States.
The company's business model operates through three major segments.
The first is the Instacart marketplace. This is the most familiar form of Instacart that allows customers to go to its site and shop for any one of more than 1,400 grocery banners. It also offers the Instacart Enterprise Platform, which provides a white-glove service to retailers, allowing them to use Instacart's technology to power their own websites, a similar product to what Shopify offers.
According to Instacart, online retail makes up only 12% of the grocery market, and developing tools like the enterprise platform and the marketplace will make it more attractive to grocers, therefore growing wallet share for the online grocery segment and bringing more grocers onto its platform.
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Key Data Points
Borrowing a page from Amazon
The third leg in Instacart's business model will also look familiar to e-commerce investors. Instacart has built a thriving advertising business, following in the footsteps of Amazon (AMZN 1.97%), which has leveraged its own e-commerce marketplace to build a massive advertising business.
Much like Amazon, Instacart, which has the largest grocery marketplace, has found that its digital real estate is valuable to grocery and consumer-packaged-good brands, delivering good returns on investment and helping to build brand awareness. In fact, advertising and other revenue jumped 29% to $740 million in 2022, making up 29% of total revenue. Through the first six months of 2023, ad revenue rose 24% to $406 million, making up 28% of total revenue.
Advertising also benefits from having a much higher margin than its marketplace, and it should continue to drive an expanding profit margin for the company.
Instacart posted a profit on generally accepted accounting principles (GAAP) through the first half of 2023, and its adjusted earnings before interest depreciation and amortization (EBITDA) came in at $279 million, up from a loss of $20 million in the period a year ago.
Is Instacart a buy?
Instacart is valued at a price-to-sales ratio of about 3 based on its current pricing range, and its debut will test the market's appetite for this unique e-commerce stock. Past IPOs for similar marketplaces, including Uber Technologies and DoorDash, have underperformed, but Instacart has a unique asset in its advertising business.
Investors may want to take a wait-and-see approach here, as IPO stocks are often volatile, but if Instacart can maintain its growth rate, the company should have a solid future ahead of it thanks to the huge addressable market, the profitability of the ad business, and the low penetration of online grocery shopping.
