The much-anticipated initial public offering (IPO) of Instacart saw a 40% surge in the company’s shares upon their debut on the Nasdaq exchange. Opening at $42, the IPO valued Instacart at approximately $10 billion on a fully diluted basis, significantly lower than its private market valuation of $39 billion during the early months of the Covid-19 pandemic in 2021. Although the opening price increased the company’s valuation to around $14 billion, the performance of Instacart in the public market will be closely monitored by venture firms and late-stage startups awaiting a return in investors’ risk appetite.
Instacart’s IPO is notable as it is the first venture-backed company to go public in the U.S. since December 2021. The performance of the IPO is being closely watched by other venture firms and late-stage startups that have been patiently waiting for investors’ risk appetite to return. While the Nasdaq has rebounded this year after a challenging 2022, companies that went public prior to the market downturn are still trading at a notable discount compared to their peak prices. Klaviyo, a software developer, is also expected to enter the market soon.
Stumbling Growth and Sacrificed Profitability
Founded in 2012, Instacart initially struggled to make its stock appealing to public market investors. Due to the surge in delivery orders during the pandemic, Instacart raised funds at $125 a share, attracting investments from prominent venture firms and asset managers like Sequoia Capital, Andreessen Horowitz, Fidelity, and T. Rowe Price. However, the company had to make significant adjustments to its stock price to generate investor interest. Instacart took the step of prioritizing profitability over growth, aiming to preserve cash and attract potential investors. In the second quarter of 2022, the company experienced a 15% increase in revenue of $716 million compared to a 40% growth in the same period the previous year and a staggering 600% growth at the start of the pandemic. Instacart also managed to generate earnings during this period, reporting a net income of $114 million, a significant increase from $8 million in the previous year.
Valuation and Competition
With a valuation of approximately $10 billion, Instacart’s value stands at around 3.5 times its annual revenue. Comparatively, food delivery provider DoorDash, which is listed as a competitor in Instacart’s prospectus, trades at 4.25 times its revenue. While DoorDash experienced faster revenue growth at 33% in the latest quarter, the company continues to face losses. On the other hand, Uber’s stock trades for less than three times its revenue, with Uber Eats also identified as a competitor by Instacart. Additionally, Instacart faces significant competition from Amazon, as well as brick-and-mortar retailers like Target and Walmart, which have their own established delivery services. For instance, Target acquired Shipt in 2017 for $550 million.
Only 8% of Instacart’s outstanding shares were offered in the IPO, with 36% of the shares sold coming from existing shareholders. Instacart CEO Fidji Simo emphasized the importance of providing liquidity for employees, stating that the IPO was not solely aimed at raising money but also allowing employees to monetize their hard-earned stocks. Co-founders Brandon Leonardo and Maxwell Mullen each sold 1.5 million shares, while another co-founder, Apoorva Mehta, sold 700,000 shares. Former employees, including executives and those in product and engineering roles, collectively sold 3.2 million shares. With this IPO, Instacart raised over $420 million in cash, adding to its existing close to $2 billion in cash reserves as of June.
The Nasdaq debut of Instacart witnessed a significant surge in its share price, marking a positive start for the IPO. However, the critical analysis of Instacart’s performance, valuation, and competition highlights the challenges ahead for the grocery delivery company. With stiff competition from established players like Amazon and traditional retailers, as well as the need to balance growth and profitability, Instacart will need to navigate carefully in the dynamic market landscape. Ultimately, the success and sustainability of Instacart’s business model will depend on its ability to adapt and innovate in an ever-changing industry.
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