Instacart, the popular grocery delivery company, made its highly anticipated debut on the Nasdaq with a bang. Surging 40% on its first day, the stock opened at $42, impressing investors and market observers alike. Clearly, Instacart’s initial public offering has left a strong impression, but is this IPO truly a game-changer for the company or just another case of overhype?
A Dramatic Shift in Valuation
With an IPO price of $30 per share, Instacart’s valuation stood at about $10 billion, significantly lower than its peak valuation of $39 billion during the height of the Covid pandemic in early 2021. However, the opening price of $42 pushed the company’s valuation up to approximately $14 billion. While this may seem impressive, it is essential to note the substantial discount at which Instacart went public compared to its previous private market valuation.
Instacart’s debut as the first notable venture-backed company to go public since December 2021 has piqued the interest of venture firms and late-stage startups. This IPO serves as a litmus test for the overall investor sentiment and risk appetite, especially after the tumultuous year that was 2022. Although the Nasdaq has shown signs of recovery in 2023, companies that went public prior to the downturn are still struggling to regain their peak prices.
Growth vs Profitability: Instacart’s Balancing Act
One key factor in Instacart’s IPO pricing strategy was its focus on profitability over growth. The company had to significantly reduce its stock price to make it enticing for public market investors by trading its earlier rapid growth for sustainable profitability. In the second quarter of 2022, Instacart managed to generate earnings and reported an impressive $114 million in net income in the latest quarter, a substantial increase compared to the previous year. However, revenue growth has slowed down, increasing by only 15% in the second quarter of 2023, a significant drop from the 40% and 600% growth experienced in the year-earlier period and the early months of the pandemic, respectively.
Competition and Challenges Ahead
Instacart faces fierce competition not only from other delivery providers like DoorDash and Uber’s Uber Eats but also from e-commerce giants like Amazon and brick-and-mortar retailers with their own delivery services, such as Target and Walmart. Target’s acquisition of Shipt in 2017 for $550 million underscores the retail giant’s ambitions in the grocery delivery space. Moreover, key players like Amazon pose a significant threat to Instacart’s market share due to their massive resources and extensive logistics network. Instacart’s ability to navigate this competitive landscape and capitalize on its early mover advantage will determine its long-term success.
Only a small portion, about 8%, of Instacart’s outstanding shares were floated in the IPO, with most sold by existing shareholders. In an interview with CNBC, CEO Fidji Simo emphasized that the primary motivation behind the IPO was to provide liquidity to its employees, rather than raising money for the company. This decision illustrates Instacart’s commitment to ensuring that its hardworking employees can have access to the value they have helped create.
The Bottom Line: Assessing Instacart’s Future
Instacart’s IPO serves as a significant milestone for the company’s growth trajectory. While the initial surge in stock price indicates considerable investor interest, the company still faces numerous challenges, including fierce competition, a slow revenue growth rate, and a market that remains skeptical of pre-downturn valuations. In this ever-evolving landscape, Instacart’s ability to adapt, innovate, and differentiate itself will be crucial to its long-term success and maintaining investor confidence. As the grocery delivery sector continues to grow, all eyes will be on Instacart to see if it can rise above the competition and deliver on its promise of reshaping the future of grocery shopping.