Instacart shares slump to their IPO price as investors have second thoughts
By Therese Poletti
IPO investors, who are focused on growth potential, appear to have some reservations about Instacart
Shares of Instacart, the online grocery-delivery service, slumped to their initial public offering price on Wednesday, as investors appeared to have second thoughts, in a setback for the newly energized IPO market.
In after-hours trading Wednesday, Instacart (CART), known formally as Maplebear Inc., fell slightly below its original offering price of $30 a share, closing at $29.85, setting up for a potential roller coaster on Thursday. At that price, retail investors would be able to buy the stock for what some institutions paid in the initial offering.
But the big question is what the company is worth. The initial reception on Wall Street Tuesday was more enthusiastic, as its shares jumped 30% at the opening, giving IPO investors the first-day pop they had hoped for.
Instacart saw its revenue surge nearly 600% in 2020, during the first year of the pandemic, when grocery delivery was a necessity for some. In the past two years, its growth rate has slowed sharply. And while that growth rate, 24.7% for 2021 and 39% for 2022, is still enviable, analysts see the online grocery-delivery market as becoming increasingly competitive. Plus, Instacart offers a service in the grocery business, an industry that operates on the slimmest of profit margins.
"If you are an intermediary in a business with slim operating margins, as Instacart is, the low operating profitability of the grocery business will limit how much you can claim as a price for intermediation, in service fees," wrote Aswath Damodoran, a professor of finance at New York University's Stern School of Business, in a recent blog post on the Instacart IPO.
In addition, a report from Needham & Co. -- initiating coverage with a hold -- noted that industry data indicates Instacart lost market share in 2022 to 21.2% from 23.1% in 2021, and is expected to lose more. Needham analyst Bernie McTernan wrote that some of that additional competition is coming from the grocery stores themselves, as they have enabled online shopping and pickup, as well as Uber Technologies (UBER) and DoorDash Inc. (DASH) as they enter more delivery markets.
Coming right after the IPO of Arm Holdings Plc. (ARM), Instacart was seen as the higher-growth option to the slower-growing but more established chip designer. But Arm has lost more than $8 billion in market value in its first four days of trading as analysts have been lukewarm about the chip designer.
And now IPO investors, who are focused on growth potential, appear to have some reservations about Instacart too. NYU professor Damodoran noted that, according to his inputs, Instacart was worth about $29 a share.
Damodoran said that when the stock was trading at about $38 after the IPO, he believed investors needed more upbeat assumptions about online grocery growth and take rates than he was willing to make. "But with this market, who knows? The stock may be trading at a discount on value, a week from now," he said.
On Wednesday, tech IPO investors found another shiny object to focus on in Klaviyo Inc. (KVYO), an email marketing company that saw its shares initially soar 23% but then ended the day up 9.2%.
For a market that had been frozen for so long, it's looking like the only investors really interested in new tech deals are the IPO mavens, primed to buy and take advantage of the first-day pop, but some are not sticking around for the longer term. Retail investors may want to take heed.
-Therese Poletti
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09-21-23 0814ET
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