Grocery delivery provider Instacart (CART 1.63%) went public last week at $30 per share. An initial surge quickly faded, bringing the stock back to that IPO price as of Thursday afternoon. Back in 2021, Instacart was worth $39 billion based on a private funding round. At $30 per share, the company is valued just shy of $10 billion.
While this steep decline in valuation is a red flag in its own right, there are a few concerning things about Instacart that investors need to know.
NASDAQ: CART
Key Data Points
1. Orders are stalling
Instacart, also known as Maplebear, grew its total number of orders by 18% in 2022, a solid performance after orders rocketed higher during the pandemic. But 2023 looks like a different story. Beginning in the first quarter of 2022, orders have essentially stagnated. The company booked 67.9 million orders in the first quarter of last year, and it has failed to surpass that total in any subsequent quarter.
Instacart and the grocery delivery industry in general surged in popularity during 2020, and so far, that elevated demand has stuck around. Will it last forever? Grocery delivery isn't cheap. Those using Instacart generally pay higher prices than what's offered in the store, and layered on top of that are fees and a tip. Instacart users may save some time, but in a tough economy with elevated inflation and rising interest rates putting pressure on household budgets, paying up for grocery delivery may stop making sense for many consumers.
2. Profits may not be sustainable
Instacart turned a profit in the first six months of 2023, which is a good thing. One thing to always be aware of, though, is that a company has a strong incentive to display the best numbers possible in the lead-up to its IPO. Instacart reported a net income of $242 million on $1.475 billion in revenue during this period, but what drove that profit may not be sustainable.
For one, Instacart grew revenue by 30%, but the cost of revenue barely budged. The company accomplished this partly by boosting transaction revenue at a faster rate than gross transaction value (GTV). This boost was driven by "optimization of customer fees" as well as fulfillment efficiencies. Retailer and customer fees together totaled 14.9% of GTV in 2022, up from 14.2% in 2021.
With order volumes already not growing, any further price or fee increases may start to push order volumes lower. Instacart also kept its operating expenses roughly flat in the first six months of 2023. That makes sense given that order volumes have stalled. To drive growth, Instacart may need to ramp up sales and marketing spending, which could hurt the bottom line.
Instacart is growing its advertising business, which is responsible for another portion of the company's revenue growth. But with orders stagnating, the advertising business may hit a wall sooner rather than later.
Time will tell
Instacart doesn't look expensive if you assume its profits are sustainable. Take net income from the first six months of this year and double it, and you arrive at a price-to-earnings ratio of less than 20.
But are those profits sustainable? Can Instacart return to meaningful order growth? Or are customers going to slowly peel off and start shopping at the grocery store as they look to save money? There's a lot of uncertainty surrounding Instacart's long-term growth prospects. Investors should tread carefully.
