Instacart Begins U.S. IPO Push (CART)

A Quick Take On Instacart

Maplebear Inc. (CART), known as Instacart, has filed to raise $100 million in an IPO of its common stock, according to an SEC S-1 registration statement.

The firm primarily provides last-mile grocery delivery services to the U.S. and Canadian grocery markets.

Instacart grew well during the pandemic, but since the end of the pandemic, its order volume growth has slowed to a very low rate.

I’ll provide a final opinion when we learn more IPO details from management.

Instacart Overview

San Francisco, California-based Instacart was founded to deliver online grocery orders to consumers in the United States and Canada.

Management is headed by president and CEO Fidji Simo, who has been with the firm since 2021 and was previously Head of the Facebook App at Meta and as Strategy Manager at eBay.

The company’s primary offerings include the following:

• Product discovery.

• Merchandising.

• Personalization.

• Multiple payment models.

• Range of fulfillment options.

• AI-powered smart carts.

As of June 30, 2023, Instacart has booked fair market value investment of $3.75 billion from investors, including Sequoia Capital and D1 Capital Partners.

Instacart Customer/User Acquisition

The firm partners with over 1,400 grocery store chains and independent grocers throughout the United States.

It provides a mobile app for consumers to add in their product discovery efforts and integrates with grocer IT systems.

Sales and Marketing expenses as a percentage of total revenue have trended higher as revenues have increased, as the figures below indicate:

Click to enlarge

(Source – SEC)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing expense, remained stable at 1.1x in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source – SEC)

Instacart’s Market & Competition

According to a 2022 market research report by Grand View Research, the global market for online grocery purchases was an estimated $286 billion in 2021 and is forecasted to reach $2.18 trillion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of a whopping 25.3% from 2022 to 2030.

The main drivers for this expected growth are changing consumer purchasing preferences, improved fulfillment technologies and last-mile delivery reliability.

Also, below is a pie chart showing the global online grocery market by product type in 2021:

Major competitive or other industry participants include the following:

• Veeve.

• Criteo.

• Quotient.

• Amazon.

• Target.

• Walmart.

• Uber.

• Blue Apron.

• Misfits Market.

• Fresh Direct.

• Getir.

• Gopuff.

• DashMart of DoorDash (DASH).

• Others.

Instacart Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing top line revenue.

• Increasing gross profit and gross margin.

• Sharply increasing operating profit and cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source – SEC)

As of June 30, 2023, Instacart had $1.96 billion in cash and $774 million in total liabilities.

Free cash flow during the twelve months ending June 30, 2023, was $387 million.

Instacart IPO Details

Instacart has filed to raise $100 million in gross proceeds from an IPO of its common stock, although the final figure may be as high as $1 billion.

Potential new shareholder Pepsi has agreed to purchase Class A common shares of up to $175 million in the aggregate at the IPO price in a concurrent private placement at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds we receive from this offering, together with existing cash and cash equivalents, if necessary, to satisfy all of our anticipated tax withholding and remittance obligations related to the settlement of certain outstanding RSUs, the repurchase and cancellation of shares of restricted stock related to the vesting of such restricted stock in connection with this offering, and the net exercise of certain outstanding stock options.

We intend to use any remaining net proceeds from this offering as well as the net proceeds from the concurrent private placement for general corporate purposes, including working capital, operating expenses, and capital expenditures.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, the firm has accrued a legal reserve balance of $65 million relating to the possibility of losing a California lawsuit “alleging unfair competition claims related to contractor misclassification,” or the “San Diego Action.” The firm has since settled with the city for $46.5 million, pending the outcome of a challenge to Proposition 22 regarding classification of “gig workers.”

The company is also the subject of other “putative” class action lawsuits related to the same contractor classification issue.

Should the company lose these putative class action lawsuits, it could increase the firm’s costs and potentially result in a material adverse effect on its financial condition and operations and lead to unionization efforts by formerly classified “gig workers.”

The listed book runners of the IPO are Goldman Sachs, J.P. Morgan, BofA Securities and numerous other investment banks.

Commentary About Instacart’s IPO

CART is seeking U.S. public capital market investment to fund its tax obligations and for general working capital purposes.

Instacart’s financials have produced increasing top line revenue, higher gross profit and gross margin and growing operating profit and cash flow from operations.

Free cash flow for the twelve months ending June 30, 2023, was $387 million.

Sales and Marketing expenses as a percentage of total revenue have trended higher as revenue has increased; its Sales and Marketing efficiency multiple remained constant at 1.1x

The firm currently plans to pay no dividends and to retain future earnings, if any, for reinvestment back into the company’s growth initiatives and working capital requirements.

CART’s recent capital spending history indicates it has spent lightly on capital expenditures as a percentage of its operating cash flow.

The market opportunity for delivering groceries is very large and expected to grow at a quite strong rate of growth in the coming years, so the firm enjoys strong industry growth dynamics but significant competition from a wide variety of competitors.

Goldman Sachs is the lead underwriter, and the eight IPOs led by the firm over the last 12-month period have generated an average return of 14.1% since their IPO. This is a middle-tier performance for all major underwriters during the period.

Business risks to the company’s outlook as a public company include slowing order growth after a pandemic-era period of rapid growth.

For example, the firm’s order growth rate in the full year of 2022 was 18% over 2021, while the first half of 2023’s order growth rate was only 0.45% over the same period in 2022.

Slowing order volume growth after the end of the pandemic is something that may require management to spend more operational cash on reigniting if the firm is to have a successful growth story for investors.

The company also faces worker reclassification risks, which may add significant costs if the firm loses lawsuits.

When we learn more about the Instacart IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.