San Francisco-based online grocery delivery company, Instacart, is preparing for its entrance into retail brokerage accounts. This move will serve as a test for investors who are interested in gig economy companies.
Instacart, known legally as Maplebear, will begin trading as “CART” on Tuesday. Like most initial public offerings (IPOs), the price will be determined the night before, and the company will celebrate the listing with its staff, according to a source close to the company.
In its filing on Friday, Instacart suggested a midpoint valuation of $9.6 billion by pricing its units between $28 and $30. This valuation demonstrates a change in market dynamics since March of last year when the company assessed itself at $24 billion. Previously, it achieved a valuation of $39 billion during a late-stage venture capital round.
The willingness of investors in the public market to invest in Instacart will partly depend on their confidence in the growth and profitability of the gig economy. Instacart, which relies on contractors to deliver groceries to customers’ homes, is seeking a price-to-sales ratio of between $3.64 and $3.9 based on its stock’s pricing and projected revenue for 2022.
The IPO Landscape
When comparing to its closest competitor, DoorDash, Instacart’s price-to-sales ratio is slightly lower at 4.2 times future sales. Other gig economy companies have even lower ratios, with Uber at 2.8 times sales and Lyft at one times sales. Evaluating start-ups based on their price-to-sales ratio is helpful as it considers their ongoing development.
Matthew Tuttle, CEO of Tuttle Capital Management, believes that this valuation is fair. Tuttle personally uses Instacart’s app on a weekly basis and believes the company will benefit from the increase in retail theft in physical stores and the potential resurgence of Covid-19. He sees this as a potential home run.
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Instacart: Scaling Up and Embracing Uncertainty
Instacart, a dynamic tech ecosystem that revolutionized the grocery delivery industry, experienced a remarkable financial growth over the years. In 2021, this industry juggernaut generated an impressive $2.55 billion in revenue, a significant increase of 39% compared to the previous year. The major contributors to this revenue surge were the fees paid by both retailers and customers, including income from their premium membership program called Instacart+. This accounted for nearly three-quarters of their total revenue. Moreover, Instacart Ads, an innovative platform introduced under the guidance of CEO Fidji Simo, a former executive at Meta Platforms, also played a vital role in augmenting the company’s income.
The ad business segment witnessed a substantial 30% growth in the past year. Retail partners usually enter into contracts with Instacart for a duration of less than a year, paying based on clicks, ad views, or a fixed fee throughout the contract period. According to the company’s filings, advertising has proven to be a “highly profitable” avenue. However, the future of ad revenue remains unpredictable and subject to fluctuations since it heavily relies on Instacart’s ability to attract new brands, expand its customer base, and venture into new markets.
Although Instacart accomplished an impressive feat by generating $428 million in net income last year, it is worth mentioning that over three-quarters of their profits resulted from a tax benefit rather than operational success.
David Hsu, a distinguished professor of management at Wharton, expressed his views on Instacart’s evolving ad business, stating, “The ad business is just starting to ramp up, and it remains to be seen how well it does.” Hsu described Instacart as “an ambitious play with a lot of uncertainty,” emphasizing the potential risks and rewards associated with their strategic endeavors.
Despite the challenges, Instacart remains optimistic about its future prospects. The recent exuberance surrounding Arm Holdings’ IPO, which led to a 10% surge in stock prices during its trading debut, along with the overall trend of new listings in the market, could potentially boost Instacart’s valuation and surpass its desired expectations.
In conclusion, Instacart’s journey has been a testament to its resilience and unparalleled vision in revolutionizing the grocery delivery landscape. While success remains uncertain and obstacles are inevitable, their commitment to growth and innovation positions them as significant players in the industry.