Instacart (CART), an online grocery aggregator and delivery service company went public to list in US recently.

The share price of Instacart price surged as much as 40% on its first trading day.

However, its share price has languished since then to reach about US$25 as of 18 October 2023. This would represent a 17% decline from its IPO listing price of $30.

Is it worthwhile adding Instacart to your investing shopping cart? We find out by understanding more about the company

instacart share price oct 2023 — Source: Screenshot from Webull app as of 18 October 2023

What you need to know about Instacart

If you are not familiar with Instacart, it is a personal grocery shopping service that allows users to purchase products from their favourite grocery stores and have the items delivered to their doorstep on the same day.

Users can also track the order’s progress and communicate with the shopper every step of the way using the Instacart website or app.

With a selection of more than 500 retailers and local grocers across 80,000 stores, Instacart is the largest online grocery marketplace in North America.

According to the company, more than 85% of the US grocery market partner with Instacart.

Users have access to over 1 billion products across the catalog, and make millions of orders through Instacart yearly.

#1 Online grocery in the early stage of growth in the US

Grocery retailing in the US is a huge market with an annual spend of $1.1 trillion. However, online grocery represented just 12% of total grocery sales in 2022, according to WPL data via Census Bureau of the Department of Commerce for Growth.

While the pandemic has accelerated the adoption of online grocery shopping, it is still lower compared to consumer electronics (66%), apparel (38%) and consumer foodservice (23%).

This has led to hopes that the market penetration of online grocery retailing market may increase in the years to come.

Instacart, which offer grocery delivery for 5,500 chain brands which account for 85% of US grocery market is likely to continue from the structural growth of online grocery retailing.

#2 Instacart’s sales surged during the pandemic but is now normalizing

The adoption of online grocery grew significantly during the 2020-2022 period, with Instacart’s Gross Transaction Value (GTV) surging from $5,144m in 2019 to $28,826m in 2022.

However, Instacart reported only a +3% year-on-year increase in GTV in 2Q23 as consumers returned to a more normalized shopping behaviour.

Instacart’s GTV grew by 4x in 2020 as US consumers stayed at home, but growth has since normalized in 2023.

instacart gross transaction value 2023 — Source: Instacart Form S-1

#3 Instacart earns about $7 of gross profit per order

Instacart’s transaction revenue consists of fees charged on retail partners on orders completed (“Retailer Fees”), delivery fees charged on customers (“Customer Fees”).

Instacart’s average transaction revenue per order is about $7, or 6.3% of GTV. Overall gross profit per order is also $7 after taking into account of cost.

Instacart also generates advertising revenue of $3/order in 2022, or a total of $740m of advertising revenue, or 30% of total revenue in 2022.

Instacart is taking advantage of the competitive of the grocery retailing landscape with its ad offering to let retailers to promote their products.

instacart order economics — Source: Instacart Form S-1

#4 Instacart’s members spend more and order more frequently

Instacart+ has a $9.99/month or $99/year membership programme, where members can enjoy waived delivery fees and lower service fees on their orders.

Instacart currently has 5.1m Instacart+ members and accounts for $8,533m of GTV. It has been calculated and data captured that Instacart+ members tend to spend 2x more and order 2x more per month compared to non-members!

instacart membership — Source: Instacart Form S-1

#5 Instacart was profitable in 2022

Instacart turned profitable in 2022, with an operating profit of $62m in 2022. This grew further to an operating profit of $242m in 1H23.

One of the reasons for the increase in operating profit is the growth in advertising revenue.

Instacart generated $740m of ad revenue in 2022, which increased further to $406m in the first half of 2023.

instacart earnings profit 2023 — Source: Screenshot from Webull app as of 18 October 2023

What are the risks of Instacart?

Spending by US consumers has been very resilient despite concerns of a slowdown. For example, US retail sales grew by 3.8% in September compared to the previous year, the highest increase since February this year.

However, we may see a weakening in consumer sentiment should interest rates stay high for a longer period of time.

This may lead to a further slowdown in transactions through Instacart.

Also, there is a risk of competitive threat from other e-commerce companies in the US. For example, Amazon also offers grocery deliveries through Amazon Fresh.

However, Instacart’s CEO believes that Instacart has an advantage as customers are not limited to a single vendor and can combine items from multiple stores in one order.

What would Beansprout do?

It is easy to write Instacart off as a company which has seen exceptional growth during the Covid-19 pandemic that may not be sustainable.

However, it would seem like Instacart has a unique positioning in the fast growing online grocery space. We also like its advertising revenue which is emerging to be a strong growth driver.

With interest rates remaining high, we would be watchful of how consumer sentiment and spending may potentially be impacted.

instacart target price — Source: Webull app as of 18 October 2023

In the meantime, Wall Street appears to be fairly positive on Instacart, with close to half of analysts having a Buy or Strong Buy rating on Instacart.

The average analyst price target is S$35 as of 18 October 2023. This would be 40% above its current share price.

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