Instacart (NASDAQ: CART) completed its much-anticipated IPO in mid-September. It was the first venture capital-backed company to go public since the IPO market froze in late 2021.
The grocery technology company got off to a red-hot start by initially popping 40% the day it came public. However, it has cooled off considerably over the last couple of months and now sits below its IPO price. Here’s a look at what investors need to know about investing in Instacart stock after its first couple of months as a public company.
The big news from Instacart since its IPO is that it recently reported its third-quarter financial results. That gave investors a glimpse into its financial progress as a public company.
Unfortunately, the report was a mixed bag, which weighed on the share price. On the plus side, the company reported $764 million of overall revenue, a 14% increase from the year-ago period. That beat the analysts’ consensus estimate of $737 million. Instacart also reported a 120% jump in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
However, growth in gross transaction volume (GTV) and orders slowed to 6% and 4%, respectively. The company noted that GTV from customers who came onto the platform in 2021 or earlier declined, suggesting it might be having trouble retaining customers. It also started to see the average price per order decline, possibly because of deflation or customers trading down to lower-priced items.
Meanwhile, Instacart posted a hefty loss of $2 billion, a stunning 262% of revenue. That was mainly due to a $2.6 billion increase in stock-based compensation, which surged ahead of the company’s IPO. After stripping out that impact, its gross profit was $561 million, a 16% year-over-year increase.
Profitability is a key trend to watch. The company had finally turned the corner on profitability over the past year:
Profit growth is crucial because rising earnings per share tend to be the key to increasing shareholder value over the long term.
Instacart expects to continue growing its GTV, revenue, and profits in the future. CFO Nick Giovanni discussed the company’s long-term growth outlook on the third-quarter conference call with investors. He noted that the company expects its GTV growth to remain in the 5% to 6% range in the fourth quarter, which is its target. Meanwhile, it expects transaction revenue to be between 6.5% and 7.5% of GTV over the long term (it was 7.2% in the third quarter). The company also anticipates growing its ad revenue to between 4% and 5% of GTV (it was 3% in the third quarter). Add it all up, and “achieving our targets for transaction revenue and ads and other revenue would bring our long-term target for total revenue to 10.5% to 12.5% of GTV and GAAP gross profit to 8% to 10% of GTV,” stated the CFO on the call. With GTV also growing, revenue and earnings should rise rapidly in the future.
Increasing its profitability remains a top priority for Instacart. CEO Fidji Simo stated on the call: “We remain relentlessly focused on profitable growth while staying disciplined and are managing the things we can control to ensure we continue delivering strong earnings and operating cash flow.” While the company’s profitability will take a step back in 2023 because of increased stock-based compensation costs, that trend should reverse in 2024. CFO Nick Giovanni stated on the call that the company expects to be in the position to “return to GAAP profitability for the full year in 2024.”
Further, management is taking the dilution from stock-based compensation seriously. Giovanni noted on the call that “we have already taken steps to manage stock-based compensation and lower dilution.” One way it intends to mute the impact of share dilution is using some of the $2.2 billion cash position it built up to repurchase shares through a recently established $500 million repurchase program (a rarity for a recent IPO).
Instacart’s stock price has cooled off after its initial IPO pop and now trades below its IPO price. While the grocery technology company did post a big loss in its first quarter as a public company, it fully expects to return to profitability next year. Further, its management team is very committed to growing profits per share. The company’s focus on increasing shareholder value instead of growing at all costs makes it one of the more intriguing IPOs in recent years. It’s a stock that investors should at least consider adding to their watchlist.
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