Instacart, the grocery delivery company, aims to go public Tuesday for $30 a share — valuing the company at $9.9 billion — a whopping 74% below its peak private market valuation.
Does that mean Instacart’s IPO is a screaming buy? I see three reasons investors would be better off buying stock in Instacart’s rival, DoorDash — which trades at roughly $80 a share and is valued at $31.8 billion:
- Faster growth. DoorDash’s revenue increased 33% in the second quarter while Instacart’s rose 15%, according to CNBC.
- More room for expansion. Thanks to its acquisition in Europe and its efforts to form new partnerships, DoorDash has significant room for future growth. By contrast, Instacart’s growth may have peaked — unless it expands into new markets or wins against Walmart.
- Higher valuation. DoorDash’s price-to-sales ratio of 4.24 is higher than Instacart’s 3.5, reported CNBC. DoorDash’s higher valuation reflects expectations for higher growth.
Instacart sees a bright future. As CEO Fidji Simo said, “At Instacart, we know technology will play a crucial part in transforming the largest retail category in the world. We also know that the future of grocery should belong to the people who make it special today — and we can help them continue to innovate,” according to MapleBear’s S1.
DoorDash — whose shares had risen 67% for the year as of Monday — envisions continued growth. As CEO Tony Xu said, “I think the world only tends to want to go faster. Customer expectations tend to only go in one direction when it comes to something like delivery, whether that’s with food or other types of items. There’s a lot of work and the roadmap ahead is quite lengthy,” according to the Associated Press.
Instacart’s IPO
Instacart priced its shares to open trading at $30 a share — valuing the grocery delivery company at $9.9 billion, CNBC reported. While growing far more slowly than DoorDash, Instacart is solidly profitable.
I expect its shares to rise significantly during the day — with help from large investors and its underwriters — in order to reopen the IPO market which has been mostly shuttered since late 2021 when fear of rising interest rates turned off investors’ appetite for that kind of risk.
Instacart’s growth is slowing down. Its revenue increased 15% in the second quarter to $716 million, decelerating from 40% growth in the year-earlier period “and about 600% in the early months of the pandemic,” noted CNBC.
Instacart’s slowdown in total order value does not bode well for investors. The company’s gross transaction volume rose only 4% in the first six months of 2023 — way down from the 15% GTV volume growth it experienced in the first half of 2022, the Journal reported.
Instacart’s S1 blamed inflation for its slowing GTV growth. However, there is more to the story — since Instacart appears to be losing market share to Walmart. The Bentonville, Ark.-based giant retailer’s share of online groceries increased from 54% in July 2022 to 62% in July 2023, according to YipitData.
The good news is Instacart is profitable. The company reduced headcount in mid-2022 and lowered customer and shopper support costs. Instacart became profitable in the second quarter of 2022, and in the latest quarter reported $114 million in net income — way above the $8 million in profit it posted the year before.
Founded in 2012, Instacart delivers groceries from chains including Kroger, Costco and Wegmans. It also sells advertising which accounts for about a quarter of its revenue and most of its profits. In a September 18 note to clients, Bernstein analyst Nikhil Devnani estimated advertising “likely accounts for most of Instacart’s profits, depending what margin ads earn,” the Wall Street Journal reported.
Unless Instacart can increase growth in grocery orders, its ad business is unlikely to accelerate. Advertising-industry analyst Brian Wieser noted Instacart’s ability to achieve faster ad revenue growth will depend “to a significant degree” on reacceleration of the company’s GTV, the Journal reported.
DoorDash’s Performance And Prospects
DooDash’s latest earnings report revealed faster growth and a forecast for more. DoorDash defied inflation and restaurant reopenings to report expectations-beating results while raising its 2023 guidance on strong demand, according to the Wall Street Journal.
DoorDash delivers a more diversified set of products than Instacart. While starting as a food delivery app — and now leading the U.S. in that category — during the pandemic DoorDash expanded into delivering “everything from groceries to alcohol,” the Journal noted.
As CFO Ravi Inukonda said, DoorDash is “becoming more of a utility and habit than you think.” DoorDash’s monthly order frequency reached a new high in the second quarter, surpassing pandemic peaks, the Journal wrote.
Here are the highlights from DoorDash’s second quarter:
- Q2 Revenue grew 33% to $2.13 billion — $70 million above the FactSet consensus.
- Q2 order count rose 25% to 532 million — ahead of Wall Street’s projections.
- Q2 transaction value increased 26% to $16.47 billion — also beating expectations
- Q2 loss narrowed. DoorDash’s net loss fell from $263 million in Q2 2022 to $172 million — “slightly better than what analysts had expected,” the Journal reported.
- 2023 transaction value guidance up to a range between $64.2 billion and $65.2 billion in 2023 — above analysts’ forecast of “around $64 billion.”
- 2023 adjusted earnings before interest, tax, depreciation and amortization raised to a range from $750 million to $1.05 billion — the midpoint of which is $74 million ahead of analysts expectation of $826 million.
In addition to more efficient operations, DoorDash is benefiting from its acquisition of European food-delivery company Wolt about which I wrote in August 2022. Wolt helped raise DoorDash’s revenue, order volume and transaction value.
Why DoorDash Stock Could Be A Better Investment
DoorDash’s stronger growth prospects — abetted by Xu’s outstanding management of the company since he founded it — should propel growth and boost its stock.
TipRanks sees 22% price appreciation in its stock based on 20 Wall Street analysts average 12 month price target of $98.47.
Morningstar sees DoorDash as a market leader with significant competitive advantages and high growth potential. As its Senior Equity Analyst Ali Mogharabi wrote, DoorDash leads Uber Eats and Grubub in the U.S. online food aggregator market and is “trying to attract a larger piece of what we estimate could be $1 trillion worth of goods and services by 2025 to its platform.”
Mogharabi gives DoorDash a “narrow moat rating” because it “benefits from the network effects between merchants, dashers, and consumers, plus intangible assets, in the form of data.”
Unless Instacart can deliver groceries more effectively and efficiently than rivals such as Walmart, I do not envision is getting anywhere close to DoorDash’s revenue growth rate.
I expect Instacart stock to trade significantly higher in today’s trading as its investors seek to reopen the market for technology IPOs.
I would avoid investing in Instacart shares after this runnup until the delivery service proves it can grow faster. Until then, after a first-day bump its stock could fade fast.
Read the full article here