The market for initial public offerings (IPOs) looks like it's beginning to heat up again, and over the last few months, several high-profile companies, including Cava Group, Arm Holdings (NASDAQ:ARM), and Reddit, have either gone public or announced their intention to do so.
With the buzz around new offerings starting to return, the online grocery platform Instacart, registering under the name Maplebear Inc., has also set its sights on the public markets.
With the leading North American grocery technology company now apparently ready to offer shares to the public, let's see whether or not investors should be buying this IPO.
What does Instacart do?
Before getting into the valuation, it's best to understand the business model that has enabled Instacart to grow so quickly since its founding in 2012.
The Instacart platform serves four primary stakeholders: retailers, orderers, shoppers, and brands.
For its retailers, which are predominantly grocers, Instacart's enterprise platform allows them to easily set up a digital storefront where customers can purchase items. More than 1,400 retail banners, including huge chains like Kroger and Costco Wholesale, happily pay transaction fees to Instacart as it helps drive more sales volume.
In total, Instacart's retail partnerships include more than 80,000 stores, which represents roughly 85% of the U.S. grocery market.
For end customers placing orders, the value proposition is pretty simple: Instacart is a convenient way to quickly buy groceries or other merchandise without needing to actually go to the store. So busy parents who might not have time to make a run to the grocery store can order all their items through Instacart and have them delivered to their door in as little as 30 minutes. This convenience has helped to attract 7.7 million monthly active orderers, who on average spend $317 per month.
On the flip side, in order to fulfill those purchases, Instacart is home to roughly 600,000 shoppers who, according to third-party estimates, make at least $4 for each order they fulfill, plus any gratuity from customers. While that pay might not sound too great, the flexibility over shoppers' hours is a benefit that many seem to value.
The last stakeholders are the brands behind the products sold. Instacart offers brands the ability to advertise on its marketplace and get directly in front of the end customer during the ordering process.
According to Instacart's S-1 filing, more than 5,500 brands, including PepsiCo and Campbell Soup, currently use InstacartAds. And the company estimates that advertisers on its platform see a 15% lift in sales on average.
A huge opportunity
Even though Instacart already processes a massive amount of orders ($29 billion in gross transaction value last fiscal year), there appears to be a vast opportunity still in front of it. According to leading consumer insights firm Incisiv, only 12% of U.S. grocery shopping was done online in 2022. Compare that to consumer electronics at 66% and apparel at 38%, and it seems grocery shopping is still severely under-digitized relative to other categories.
That 12% isn't a huge chunk of overall grocery spending, but it's growing rapidly. Largely due to the pandemic, online spending as a percentage of overall grocery spending has quadrupled since 2019 from 3% to 12%, and Instacart management believes this could double over time.
And grocery isn't the only market where it could see success. Other retailers like Lowe's, Best Buy, and LVMH's Sephora have begun to tap into its marketplace as well.
It's difficult to pin down any accurate estimate on the opportunity in non-grocery shopping, but as Instacart's marketplace of shoppers and customers continues to grow, the convenience of having someone shop on your behalf can translate to many other industries.
Should investors buy the IPO?
According to the company's most recent S-1 filing, Instacart is planning to price its shares at $26 to $28 on its debut, which would imply a fully diluted market cap of around $9 billion.
Over the last 12 months, it had $2.9 billion in revenue, which was growing at 15% annually as of the latest quarter. And unlike many young, private tech companies, Instacart is actually profitable, with trailing-12-month net income of $744 million (helped by a one-time tax benefit) and $404 million in operating income. Based on its estimated debut market cap, the stock would be trading at a multiple of market cap to operating income of roughly 22.
While that doesn't appear to be too commanding of a multiple, it's worth examining the history of success when investing in IPOs. Studies show that three years after companies' IPOs, the vast majority of the stocks underperform the market. Although Instacart appears to be the leader in a growing industry and could potentially be an outlier, history shows that it pays to wait.
For now, I think investors should keep Instacart on their watch lists and wait a couple of quarters before considering an investment.