I wanted to hate last week's Instacart (CART +3.56%) offering. The undisputed leader of third-party grocery deliveries hit the market with all the swagger and confidence of a shopper trying to sneak a dozen items through the 10 items or less checkout lane. I figured there was no way that Instacart would pan out as a long-term investment.
Am I an active user on the platform? Sure. It's convenient, and there are plenty of opportunities to buy Instacart gift cards online at a discount. There are also several credit cards that provide monthly credits to use the service. However, my doubts about the Instacart business model make up a lengthy shopping list. Will consumers put up with the platform's product pricing markups? Can it incentivize its fleet of last-mile contractors in a gig economy with less laborious alternatives? With DoorDash and Uber Technologies encroaching on Instacart's turf, can it cling to its niche dominance?
Then I did what any good investor should do. I cracked open the offering prospectus and looked for the reasons to justify my initial bearishness. In the process of spooning through the metrics I found that Instacart tasted different -- better different -- than I was expecting. The red flags were there. The green shoots surprised me. Let's go over a few reasons why Instacart could be a winner for risk-tolerant growth investors.
NASDAQ: CART
Key Data Points
1. It's a ground-floor opportunity
Instacart priced 22 million shares at $30 apiece late last week. It wasn't a surprise to see the shares skyrocket on their first day of trading last Tuesday. It's a high-profile debutante after all. The stock opened at $42, but hype collided with gravity. Instacart closed out the week exactly at $30.
Last week was a round trip to nowhere. Today's buyers can get in at the initial public offering (IPO) price, and not the elevated pop that some unfortunate individual investors chased out of the gate. An argument can be made that Instacart is expensive even at its IPO price. Getting in on the ground floor isn't a bargain if the elevator then goes down to the basement. Instacart may or may not be a broken IPO in the coming months, but for now, waiting a few days for the stock to return to its $30 IPO price was the right move.
Image source: Getty Images.
2. Revenue is still growing
Instacart mentions in its prospectus that gross transaction value has grown at a compound annual growth rate of 80% between 2018 and 2022, but the headiest of that growth took place early in that five-year timeline when Instacart was a lot smaller. It doesn't mean that Instacart isn't still posting double-digit-percentage gains on the top line.
Revenue for Instacart rose 39% last year, accelerating from the 24% ascent it posted in 2021. Revenue is up a healthy 31% through the first six months of the year. Despite DoorDash and Uber expanding beyond restaurant delivery and supermarket chain Kroger pushing its own direct-delivery model, Instacart is finding ways to grow its business.
3. Instacart is surprisingly profitable
One of the biggest surprises with Instacart is that it's already generating positive net income. Instacart was profitable last year even after backing out a favorable income tax benefit. It's only building on its results in 2023.
Instacart's operating profit was $62 million for all of 2022. It's at a beefy $269 million through the first six months of this year.
4. It's just getting started
Instacart is stickier than you think. It has facilitated 263 million orders for $29.4 billion in gross transaction value over the past four quarters. You pay a premium for the convenience that Instacart offers by saving you a trip to the store, but folks are paying. Instacart's 7.7 million monthly active orderers are spending an average of $317 a month on the platform.
U.S. online grocery penetration has gone from 3% of the market in 2019 to 12% last year. The ceiling isn't 100%, but it's a lot higher than 12%.
5. It all ads up
One of the more interesting morsels about the Instacart model is that advertising is a significant part of its revenue mix. Instacart generated $740 million in ad revenue last year, 29% of its reported revenue. It's a similar 28% share of the top-line mix through the first half of this year.
You might not think of Instacart as an advertising company, but it makes sense. Instacart offers home delivery for chains making up 85% of the U.S. grocery market. With 5,500 brands vying for attention, why wouldn't they pay Instacart to stand out at the moment of purchase, potentially minutes before delivery and possibly consumption? These same brands pay physical grocery stores for prime shelf space and inclusion in weekly circulars. Instacart is feasting here as a tech platform without the burden of the razor-thin margins that plague supermarket operators.
Instacart doesn't belong in every investor's shopping cart. It's risky. However, take a closer look and you may be surprised to see it come home with you.
