Prominent grocery technology company Instacart (CART) made a strong entry into the stock market with its September initial public offering (IPO). Nevertheless, the online grocery delivery and pick-up service provider swiftly relinquished the initial gains associated with its public trading debut, and CART is now trading significantly below its IPO price of $30.
Now that Instacart stock has pulled back considerably, let’s take a look to determine whether CART is worth buying near current levels.
Leader in Online Grocery Delivery
Maplebear, officially known as Instacart, stands out as a dominant player in the online grocery delivery space. Through strategic alliances with over 1,400 national, regional, and local retail establishments, Instacart has significantly evolved over the years. This is reflected through the remarkable growth of its Gross Transaction Value (GTV).
Notably, Instacart's GTV - which includes the online sales generated in collaboration with its retail partners - has displayed impressive growth, and increased at a CAGR of 80% from 2018 to 2022. This easily outpaces the 50% CAGR observed in the broader online grocery market.
Further, grocery is the largest retail category, and represents a large addressable market in the United States. However, only a fraction (about 12%) of grocery sales are made online. This implies the company has a long runway for growth as people shop online and online penetration increases.
Instacart boasts the most extensive array of grocery stores available on its platform in North America. In addition to the Instacart Marketplace, the company supports numerous retailers in establishing and running their online stores through the Instacart Enterprise Platform. The company offers comprehensive technology solutions spanning e-commerce, fulfillment, connected stores, advertising, marketing, and data-driven insights. This positions it well to maintain its leadership in the online grocery delivery space, capitalize on the ongoing digital shift, and deliver solid revenue and earnings.
Ramping Scale to Support Growth
Instacart’s growing scale is reflected through its large base of retail partners and brands. This enables the company to offer a wide selection, value, and convenience to shoppers - thereby driving more customers towards its platform, increasing order frequency and average order value, and building user engagement.
Given its growing scale and higher user engagement, Instacart leverages data from its Marketplace to improve its enterprise solutions, including expanded fulfillment options and greater brand management. Moreover, its growing scale and frequency of large orders enables Instacart to offer retailers a more cost-effective fulfillment solution, which attracts a wider array of brands to its platform and boosts its GTV and overall revenues.
Diverse Revenue Streams
In addition to its Instacart Marketplace and Instacart Enterprise Platform, the company offers brand-focused advertising solutions that diversify its revenue streams. These advertising offerings encompass sponsored products, brand pages, display ads, and coupons. Notably, Instacart states that its ad solutions are highly effective and offer a higher return on investment. This is attributed to the company’s ability to enable brands to connect with consumers precisely at the point of purchase and within minutes of delivery and consumption.
As a result, Instacart experienced substantial growth in its advertising and other revenue, surging from $572 million in 2021 to $740 million in 2022, marking a noteworthy year-over-year increase of approximately 29%. That upward trajectory continued during the first six months of 2023, with advertising and other revenue climbing by 24% year-over-year to reach $406 million.
In the future, the company is focusing on enhancing its display advertising offerings, which will help brands to engage with customers in impactful ways. This includes the introduction of collections featuring shoppable products and brand pages. Further, Instacart continues to invest in improving the optimization and measurement capabilities of ads, as well as extending the reach of Instacart Ads to retailers’ online storefronts.
Bottom Line
Instacart, with its extensive retail base, multiple product offerings, ongoing digital shift, and diverse revenue streams, is poised to deliver strong growth ahead. Further, its capital-efficient business model allows it to acquire new retail partners without significant capital investments or taking any inventory risk, which is positive.
While most Wall Street analysts are bullish about CART, a few aren't willing to endorse the stock. Notably, digital-first platforms like Instacart face heightened competition from well-capitalized competitors, which can lead to increased customer churn and hurt its market share growth. Moreover, the company’s transaction and advertising revenue growth has slowed slightly, which may leave some analysts wary.
Of the 12 analysts covering Instacart stock, eight have a “Strong Buy” recommendation, and four have a “Hold. Moreover, the average price target is $36.30, which implies 40% growth potential from current levels.
