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Newly-listed Instacart is trading at all-time lows, but it’s not a good buy; here's why

The IPO market has been pretty boring this year. Very few companies have opted to go public, largely due to market, economic, and macro uncertainties. Indeed, the environment for newly listed companies has been hostile. About 80% of recent IPOs are trading below their initial offering price, indicating a rather poor performance. One such underperforming stock is Instacart, officially known as Maplebear Inc. ($CART). Currently, CART is trading at all-time lows following a disappointing first earnings report as a public company.

While it may seem like a good buy at current prices, it’s probably more akin to a bear trap. Despite CART’s leading market position in the grocery delivery space and its high-quality services, the company is facing significant growth headwinds. Its largest customers have begun reducing their spending, a concerning trend for a company that once claimed massive growth prospects. CART's minimal growth is a red flag, indicating it may not live up to its earlier promises.

Leader In A Highly Competitive Space, Lack Of Moat

Instacart has been a major beneficiary of the golden VC years, fueled by low interest rates and the growth of mobile internet. From 2012 to 2022, investment in U.S. startups surged eightfold to $344 billion. Since its inception in 2012, Instacart raised $2.9 billion in venture capital, using this funding to aggressively expand and capture market share in the emerging grocery delivery sector.

Grocery and restaurant delivery has been around for generations. But before the 2010s, customers had to do some work to make sure food arrived at their doors. They had to know which grocery stores delivered. Then, they had to go pick out their items and leave them for someone to bring them, or have a grocer who could take an order by phone. Everything changed in the 2010s, primarily because the websites and apps removed all the hassle and made online ordering more convenient. They gave home cooks a huge array of supermarket items, whether they needed them in an hour, or could wait a day or two for them to land on their doorsteps.

At the forefront of this change, Instacart used substantial venture capital to invest heavily in customer acquisition and product development. As of 2023, the online grocery market in the United States is expected to reach $160.9 billion. With Instacart’s projected Gross Transaction Volume (GTV) of $30.45 billion for 2023, the company holds an 18.92% market share. While impressive, this is a decrease from its 21.6% share in 2022, indicating a loss of market share, primarily due to stiff competition from retail giants like Amazon ($AMZN) and Walmart ($WMT).

Competitive pressures aside, Instacart’s most loyal customers have started to reduce their spending. Without giving specific details, management said on the most recent call that the GTV from mature cohorts collectively declined. The exact reasons behind this weak performance are not clear but it could be a combination of macro pressures and increasing competition. This is a concerning trend and it may be a sign of reducing customer loyalty.

The End Of The High Growth Period

CART experienced dramatic growth in the past decade, thanks to relatively low competition and aggressive investments in customer acquisition. The pandemic further boosted this trend, with CART's GTV more than quadrupling to over $20 billion in 2020 and its market share doubling.

However, this growth has stalled post-pandemic. In the most recent quarter, GTV grew by only 6% y/y to $7.5 billion, driven by a 4% increase in orders and a 2% rise in Average Order Value (AOV) to $113. This performance suggests that CART is past its high-growth phase.

Ad revenue could save the company from delivering single-digit revenue growth rates, at least in the midterm. Instacart launched Instacart Ads in 2020, in order to leverage its soaring popularity to make higher-margin revenue. Instacart Ads allows brands and retailers to promote their products to consumers at the point of purchase. Brands can feature their products in search results or as banner ads, increasing visibility and potentially boosting sales. This is currently the company’s fastest-growing revenue stream. In Q3, Ads revenue increased 19% y/y to $222 million, helping the company deliver double-digit revenue growth of 14%, despite the single-digit growth of GTV.

Also, Ads revenue has been crucial in improving Instacart’s bottom line. Excluding stock-based expenses and other non-cash items, the company reported an adjusted income of $163 million in Q3, translating to an adjusted income margin of 21%, compared to 11% a year earlier. The rapid growth of this high-margin segment suggests that Instacart’s profit margins could continue to improve if the company doesn’t need to significantly increase marketing expenses to protect its market share.

What About Valuation

CART went public at a very unattractive valuation. As you can see below, it started trading in September at a PS ratio of over 3x, which is considered expensive for a company that barely grows. After a 30% drop from the first day of trading, CART is now trading at a PS ratio of 2.2. While it’s a more reasonable multiple, the upside potential is still limited given the company’s growth stagnation. In fact, if the company fails to accelerate its GMV growth, the PS ratio could fall even further, making its current valuation unattractive.

What Else

Instacart has been a successful venture for early VC investors and founders, but not so for late-stage VCs and individual public market investors. The company went public at less than $10 billion, a fraction of its $39 billion valuation in 2021. Given the saturated market and increasing competition, it's unlikely that Instacart will return to its peak valuation anytime soon. At its current low, the stock still doesn’t appear to be a promising pick for long-term investors, considering all the growth headwinds.

Personal Portfolio Update

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