Instacart (CART 3.06%), the grocery delivery company formally known as Maplebear, finally went public this month. There were originally talks of the company going public back in 2021 when its valuation looked like it might fetch around $40 billion, but that didn't pan out.
Since then, its valuation has fizzled, and its market cap sits at around $8 billion as of this writing. Is this grocery delivery stock a good buy now that it's at a lower price tag, or should investors avoid this fresh IPO?
Why the company could make for a good buy
What makes Instacart appealing is that it has a broad reach into the U.S. grocery industry. It has partnered with over 1,400 retail banners, which gives it a presence in more than 80,000 stores across the country, representing 85% of the industry. With such a strong presence, the company is in a great position to grow its sales, something it has continued to do.
Instacart's revenue of $1.48 billion through the first six months of 2023 was up 31% year over year. What's also impressive is the company reported a profit of $27 million during that time frame, up from a net loss of $74 million in the year-ago period.
It's also helpful the company generates a high gross margin of 75%. Provided its overhead doesn't grow significantly, that should result in increased profitability as Instacart's top line grows. And as the company's profit increases, so too should the valuation and the price investors are willing to pay for the stock.
Why Instacart is risky
The long-term risk with Instacart is its lack of a substantial competitive advantage. There is nothing proprietary about offering grocery delivery services -- Uber and DoorDash do the same. And there are no significant barriers to entry to prevent other companies from entering the space or for grocers themselves to bring deliveries in-house.
There are also signs growth is slowing. For the second quarter, sales of $716 million were up only 15% year over year. A year earlier, the growth rate was 40%. Inflation is certainly playing a role in that slowdown as consumers have to find ways to scale back spending.
But another headwind could be coming: the resumption of student loan repayments. During the early stages of the pandemic, there was an uptick in spending across the economy, and food delivery benefited from that in a big way. But withe COVID stimulus gone and budgets tightening up, consumers will start paying back student loans next month too. This could prove to be a big test for Instacart to see just how strong its growth prospects really are.
Food and grocery delivery are highly discretionary expenses that most budget-conscious consumers can likely do without. So, I wouldn't be so confident about the company being able to sustain even a double-digit growth rate while also remaining profitable. While Instacart has generated a profit recently, it still might be too early to say that this is a proven business model that can grow its profits in the long run.
Should you buy the stock?
Instacart's business has been growing at a good rate, but it comes with an asterisk. Whether it can continue to sustain this level of expansion is the big question right now. The pandemic boom is over, and Instacart's first few quarterly results out of the gate will help investors gain further insight into how the company is faring, which is why investors should hold off on buying the growth stock for now.
