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Instacart is one of the hottest tech IPOs in 2023. It is expected to go public with a nearly $10B market cap, making its founder almost a billionaire while making many Silicon Valley investors, including Y Combinator startup accelerator, a lot of money.
But Instacart wasn't always this hot idea and startup, nor was its founder a successful entrepreneur. Aprova Mehta, the company's founder, is an Indian-born who went to school in Canada as an Engineer and later moved to the U.S. to work for Amazon. He had worked on 20 products and startups in the two years between quitting his job at the eCommerce giant in 2010 and launching Instacart in 2012, and sadly, all had failed. From building an ad network for social gaming companies to spending a full year developing a social network specifically for lawyers, he tried many companies, and none stuck.
Instacart's $10B valuation and IPO success is the story of building the right product for a massive market at the right time. Its success sits at the intersection of eCommerce and Gig Economy, and it can be a great investment when it goes public.
If you are curious about Instacart, ticker CART, let's research it together.
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
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This episode is a mix of interesting investing-related stories and fundamental analysis. But before discussing either, let's talk about the elephant in the room. Instacart's corporate name isn't Instacart. It is Maplebear, doing business as Instacart. When the initial founding team incorporated the company in 2012, they registered it as Maplebear. Don't get confused if you see that name on the company's Stock Card when you research it on StockCard.io (our platform) or if you look it up on your brokerage account. Honestly, I spent an hour trying to figure out why Maplebear but didn't find a good answer. So, that's that!
Now, to the real story and the fundamental analysis:
The Right Product At the Right Time In a Massive Product
I started this episode by saying that Instacart is the story of building the right product in a massive market at the right time.
The online grocery market is rapidly growing, with more than 25% expected annual growth rate until 2030. According to the company's IPO documentation, only 12% of grocery shopping is now happening online, and when you talk about a $1.1 trillion market, even a 1% increase in that rate means an $11B in revenue potential for Instacart. This is the advantage of building a product for a massive market such as groceries, which translates into a significant growth potential.
By the way, if you want a list of other online grocery stocks, type it in the search bar on StockCard.io, and under the themes column, you'll find the list.
If you are new to Stock Card, we manage a database of more than 500 themes and collections. We've got you covered if you are looking for online grocery, generative AI, EV stocks, or any other theme.
Go to StockCard.io and look up the theme you are interested in the search bar. You can also use the screener to make your search even more accurate. For example, what if you look for online grocery stocks with growing sales?
Go to the screener tool, put online grocery in the keyword search, and apply any additional filter you want. I just created this screener, and here's the link to it in the show notes in case you want to continue your research or copy the screener to your own Stock Card free account.
Back to Instacart, the growth isn't limited to the online grocery market. The company has also realized the power and profitability of the digital advertising business model. Roughly 30% of Instacart's revenue comes from advertising. This is when consumer packaged goods brands pay Instacart to run special promotions, place their products in more prominent sections of the app, and let them run promotions and deals directly to the customers.
When I use Instacart to order groceries, I am always shocked by big brands' promotions and deals on the App. For example, there is always a big push by PepsiCo to purchase more of its snacks to get free delivery. Indeed, when you dig into Instacart's IPO documentation, you'll realize Pepsi will invest $175M in the IPO, indicating how important it is for big consumer packaged foods brands to directly influence the consumers' purchase decisions, and the online store is the best place to do so. The digital advertising and the chance to grab shares of consumer packaged goods ad dollars expand Instacart's addressable market significantly.
However, the idea of online shopping wasn't new, even in 2012, when the company started its operations. Neither was the idea of online grocery shopping. Before Instacart, there were myriad online grocery companies. Webvan was the most known online grocery company that had raised more than $400M in venture capital funding and operated for three years before it went under when the dot-com bubble burst in 2000-1. How did Instacart succeed when many failed? It's all about timing. The online grocery concept could not have found a strong demand until eCommerce truly gained mass traction. In the U.S., the 2010s decade was when eCommerce started to really take off.
Moreover, Instacart could only scale when it could harness the advantages of the gig economy. The gig economy refers to independent contractors hired for a specific task. All Uber drivers and food delivery workers are considered gig workers, and that market also took off after the 2008 financial crisis as more people looked for supplementary income and other means to make any money. The gig economy has risen in the last decade, with a 15% annual growth rate from 2010. Since 2015, three years after its founding, Instacart dabbled in the gig economy. It now heavily relies on its independent "shoppers" who get paid hourly to use the app to do the grocery shopping on behalf of its customers. Without broad acceptance of the gig economy and the normalization of working as a gig worker, Instacart operations couldn't have been as profitable as it is today because it doesn't need to own its own fleet or hire its shoppers, which makes its operations quite scalable.
How does building the right product at the right time and in a massive market fair against our usual fundamental analysis framework?
Instacart (CART) Fundamental Analysis
Mind you, the main driver of FCF and net income are related to tax credit allowance due to deferred tax assets in Q4 2022. This is when a company has paid too much taxes and can claim them back. In the case of Instacart, it had a much bigger valuation a year ago and is allowed to claim valuation-related tax assets.
Looking at the above fundamental, Instacart has chosen the best moment in its operating history to go public and paint a good picture. However, I am concerned about the revenue growth, its business model's unit economics, and whether the expected roughly $10B IPO valuation is justified.
Instacart (CART) Valuation
At an almost $10B fully diluted valuation, the company is going public with an almost 4.5X price-to-sales ratio. The 4.5X price-to-sales ratio means it required sustained 35% annual growth in revenue in the next 5 years to grow in that valuation. Historically, looking at it 1H of 2023 vs. 2022, the company achieved 31% growth. It also grew 39% in 2022, vs 2021. So, the recent revenue growth is right about the 35% target it needs to achieve to justify its valuation. However, if you look at the number of orders on Instacart in the first half of the year vs. last year, you see almost no growth. To justify the valuation, we need to see more evidence of such 30%+ revenue growth for a few more quarters to believe the revenue growth is sustainable.
So even if the company has had its valuation from almost $40B in 2021 down to $10B in 2023, it isn't undervalued.
But of course, companies don't reach their valuation just by growing sales. They become more profitable and generate more free cash flow to get higher multiples. There lies another concern. After deducting the cost of sale, the biggest expense for Instacart is the cost of user acquisition.
In 2022, the company spent nearly $650 million on customer acquisition. In the IPO documentation, the company talks about how, before the COVID-19 pandemic, its unit economics wasn't mature. This means the cost of acquiring a new user was much higher than the revenue each user used to generate. During the pandemic, they saw significant organic use growth, leading to higher gross profit per user. There is the risk that people will gradually return to in-person shopping as we move away from the pandemic. I see it in my own behavior. I was 100% an Instacart user during the pandemic, and now less than once a month. Old habits die hard, as they say, and it took me a year to gradually put Instacart aside most weeks, but it is happening. I expect Instacart needs to spend more and more on advertising and consumer incentives and discounts. Even now, it is barely profitable. That's my biggest concern about buying the stock at the IPO. I want to see a few quarters of sustained user growth without a significant increase in user acquisition before jumping in.
The advantage Instacart has is its market leadership. Other players such as Amazon Fresh, Uber Grocery, and other grocery delivery companies are far behind Instacart, and although they are gaining market share, as per the IPO documentation, Instacart benefits from a much higher average order value than the competitors. In the online grocery segment, Instacart has the lead over others.
Is Instacart (CART) IPO A Buy?
I plan to let it go public and see how it can sustain its revenue growth in the coming quarters. There is simply too much of a residual effect from the pandemic on consumer behavior that I would want to see a few more quarters of sustained growth.
If you have a different strategy, share in the comments, and if you like an episode like this with a mix of investing stories and fundamental analysis, like and subscribe so I know what you want to watch and listen to more.
I'll see you next time!