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Grocery deliveries expert Instacart started exploring an initial public offering (IPO) in 2020. The company finally executed that plan two months ago, under the name of Maplebear (NASDAQ: CART).

While I appreciate the parent company’s references to its largest target markets in Canada (maple) and California (bear), I’ll gladly stick with the more familiar Instacart name below. On a related note, I’m just about as ready to buy Instacart’s stock as I am to use the Maplebear name. In other words, I’m staying on Instacart’s sidelines for now.

What would it take for a seasoned investor to consider adding Instacart to their portfolio? Here’s my list of key sticking points in November 2023.

Image source: Getty Images.

1: Oodles of stock-based compensation

Issuing stock to employees is a common compensation strategy in the proverbial Silicon Valley. With headquarters next door to Salesforce (NYSE: CRM) Plaza and just down the street from the Databricks offices, stock-based compensation is a natural fit for Instacart.

But the company is taking that accounting option a few steps too far, in my opinion.

Instacart reported $2.6 billion of stock-based compensation costs in the third quarter of 2023 — the only earnings report available so far. That’s 86% of the company’s operating expenses for the quarter, and far above the period’s top-line revenue of $764 million.

Compare and contrast these figures with a mature tech giant like kitty-corner neighbor Salesforce, whose stock-based compensation accounted for 12% of its most recent operating expenses.

Or you could check out another high-growth phenomenon such as machine-powered insurance expert Lemonade (NYSE: LMND). Here, the issuance of Lemonade stock instead of cash-based paychecks worked out to 19% of the most recent quarter’s operating expenses.

I understand the accounting benefits of stock-based compensation, reducing the cash costs of running an office full of top-talent engineers while also motivating everyone to drive the stock’s value higher over time. But you can take that idea too far, and I think Instacart falls in that category. At this exaggerated level, the compensation effort dilutes the stock’s value — and how long will that exclusive engineering talent stick around if Instacart’s stock price drops too far?

Therefore, I’d like to see Instacart slowing down its stock-based compensation dramatically. I can’t take the company seriously with this compensation system’s lopsided cash-to-stock balance.

2: That 800-pound gorilla in the delivery sector

There are many delivery specialists in the flourishing gig economy, all with similar promises of quick delivery and accurate services at a low cost. Most of them focus on restaurant deliveries, leaving the grocery-goods corner in a less crowded state. Instacart has already made a name for itself in that hyper-specific sector, becoming the default delivery service for hundreds of regional and national store chains.

But there may not be much room for further expansion. In fact, Instacart already saw retail giant Walmart (NYSE: WMT) canceling its Instacart service after a brief six-month trial period to ramp up its in-house deliveries instead. Rumor has it that Publix, the local hero in my neck of the Floridian swamps, may not renew its current Instacart contract when it expires at the end of this year. Nationwide grocery giant Kroger (NYSE: KR) is doing the same, and that chain’s delivery trucks are already on the streets of Tampa Bay.

These developments not only represent lost opportunities — they also suggest a trend of retailers taking control of their delivery services.

And I haven’t even mentioned the true heavyweight of grocery deliveries yet. DoorDash (NASDAQ: DASH) is mostly seen as another restaurant delivery partner, but this giant has also dabbled in grocery deliveries for years.

“[W]e have over 100,000 stores on the platform that are outside of restaurants,” DoorDash CEO Tony Xu said in the third-quarter earnings call three weeks ago. “And when you look outside of restaurants and into the convenience or grocery or alcohol segments, almost half of new customers that come into the industry in the U.S. come to DoorDash first.”

I don’t know how Instacart can grow its business under these circumstances. The company seems to have picked all the low-hanging fruit, has lost a few key partners already, and faces more intense competition from sector titan DoorDash. I need to see that Instacart can keep up its growth plans for a few quarters.

It’s comfy here on Instacart’s sidelines

That said, the young company is doing many things right. The recently signed marketing partnership with The Trade Desk (NASDAQ: TTD) looks like a stroke of genius. Solid revenue growth in an era of tight purse strings is an impressive achievement, and the company sits on a helpful cash reserve of $2 billion.

Still, that’s not enough to overcome the deal-breaking issues listed above. I won’t reach for Instacart’s “Buy” button until I see progress on these crucial fronts.

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Anders Bylund has positions in Lemonade and The Trade Desk. The Motley Fool has positions in and recommends DoorDash, Lemonade, Salesforce, The Trade Desk, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.

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