Instacart’s IPO could see the $24 billion pandemic darling’s growth story accelerate once more.
Instacart IPO: how to buy shares
We’ll offer Instacart stock on the day they list. Bear in mind that, since Instacart is likely to list in the US, the shares could take a few hours to become available to trade. This is the case for all brokers.
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What is Instacart’s growth story?
Instacart is a grocery delivery and pick-up company based in the United States. Customers order from Instacart partner retailers through its website and mobile app and receive goods from personal shoppers.
The company was found in 2012 by former Blackberry, Qualcomm, and Amazon engineer Apoorva Mehta, and funded at first with $120,000 through a Y Combinator Accelerator. The businessperson had previously suffered over a dozen previous start-up failures between 2010 and 2012.
However, the entrepreneur had both the contacts and the tenacity to grow his start-up by positioning it strategically within a unique market niche: offering a delivery service even faster than the one-day offering of its rivals.
Instacart generates profit by charging delivery fees on grocery and pick-up orders, charging $3.99 for same-day orders over $35, with a minimum order value of $10. Fees vary for one-hour deliveries, club stores deliveries, and deliveries of orders worth less than $35.
Many customers subscribe to an annual membership for $99, or $9.99 monthly, that offers free delivery at off-peak times and reductions on-peak. It also tacks on a service fee which is dependent on several factors including whether alcohol is included and the order size.
After multiple funding rounds, the start-up had launched across 20 cities by 2014, and begun signing deals with industry titans including PepsiCo. And after raising over $2.7 billion in private funding rounds, the company increased its value from a mere $3.4 billion in 2017 to $17.7 billion by October 2020.
The company’s strategy to make speedy grocery shopping easier for consumers while allowing smaller companies to benefit has worked well. In 2016, its partnership with Whole Foods allowed Instacart exclusive delivery rights, before its subsequent purchase by Amazon.
However, Amazon’s purchase so unnerved supermarkets that many chose to partner with Instacart, with 350 retail partners signing up to deny Amazon market power.
Then the covid-19 pandemic gave Instacart a much-needed boost. With order volume skyrocketing by 500% during mandated lockdowns, Instacart generated $1.5 billion of revenue in 2020 and $1.8 billion in 2021.
According to eMarketer, Instacart was responsible for just under 11% of e-commerce grocery sales in 2019. By the end of 2020, this market share had doubled to 22%. And grocery sales alone rose from $7 billion in 2019 to more than $23 billion in 2020.
A spokesperson told investors that 2021 saw record highs in orders, gross transaction value, revenue, ad revenue, and gross profit, but declined to give exact figures.
At its latest funding round during the pandemic-heyday of 2021, Instacart had reached a valuation of $39 billion. But several weeks ago, it slashed this figure to $24 billion in keeping with the market hammering of US tech stocks.
What now the pandemic is fading?
The growth injection has seen Instacart expand into different geographical markets, launch new products, and work together with retailers specialising in goods ranging from alcohol to medical prescriptions to beauty.
But as lockdowns end and the pandemic fades away, consumers are becoming ever more confident to shop in person, and Instacart sales could be dropping. Partnership talks with Uber and DoorDash have also led to nothing so far.
And Instacart has several competitors, including those who use the same model of delivering via third party grocers, such as Shipt, and also directly sourcing models like FreshDirect. There are also meal kit sellers like Blue Apron and the ever-ubiquitous Uber. However, with its gigantic market share, Instacart’s competitors are struggling to gain ground.
In Autumn, the company postponed initial plans to launch its IPO to focus on the growth of non-delivery services for retailers. Under new CEO Fidji Simo, it’s launched multiple websites and apps, fulfilment services, advertising, and data insight tech. Simo has told investors she wants to ‘build the technologies that can power every single grocery transaction.’
The CEO plans to go much further than just deliveries. In common with Amazon, Tesco, and various other outlets, it’s working on the smart shopping of the future. It’s purchased AI start-up Caper AI, which is developing a smart AI trolley with computer vision that recognises products as they are added, charging shoppers automatically for purchases.
Instacart plans to offer the tech to other companies without the finance or expertise to develop their own solutions as the natural progression in convenience from self-service tills.
How profitable is Instacart?
During the pandemic, Instacart was instrumental in helping smaller grocers compete with Walmart and Amazon to get online quickly, and now partners with 750 retailers across more than 70,000 shops. But many of its partners originally operated at a loss, and many, including Kroger, have now built their own platforms.
And it’s not known how profitable or unprofitable Instacart is. As a privately-owned company, it’s not required or expected to, publish full results. However, investors know from an insider leak that its first profitable month was in April 2020. But it’s very possible, and perhaps to be encouraged, that any profits are still being spent on the growth story.
Inflation at 8.3% could pose a challenge for the stock. Instacart still operates predominantly in the grocery sector, where margins of around 2-3% are not uncommon and competition is intense. This makes increasing fees a disproportionately large burden on either the grocer or the consumer.
And until Instacart sends in an S-1 filing, better-detailed financials will remain off-limits. However, a spokesperson has confirmed it has $1 billion in cash and marketable securities on the balance sheet.
But it has institutional backers with serious financial clout, including D1 Capital Partners, T. Rowe Price Fidelity, Sequoia, Andreessen Horowitz, and Kleiner Perkins. However, the working relationship remains tense after Mehta stepped down as CEO in July after difficult discussions with a group of board members led by Sequoia’s Michael Moritz.
Isn’t this a bad time to IPO?
The Federal Reserve is making increasingly hawkish noises towards tighter monetary policy, and this has at least contributed to the significant market corrections in both the NASDAQ Composite and the S&P 500.
Tech stocks like Instacart grow and hence are valued on, the nectar of cheap money. And the Reserve is predicted to hike rates to as much as 3% by the end of the year. When Instacart is ready to launch its IPO later this year, it could be in even tighter financial circumstances than now.
The star performers of the pandemic are already suffering. Benchmarks including Scottish Mortgage and Ark Invest have already more than halved in value, as have the likes of Tesla, Peloton, Zoom, Roblox, DoorDash and Shopify.
These tech stocks had a government-enforced competitive advantage during the pandemic lockdowns, but those days are over. And now, like Instacart, they must prove their worth in a post-pandemic world. Pitchbook analyst Alex Frederick notes ‘the timing doesn’t seem ideal.’
But in March, Simo enthused ‘I want to attract investors that understand this long-term vision and understand what we’re trying to do, and so, there’s no rush.’
The question is whether Instacart can continue to grow its market share. eMarketer research shows Instacart’s grocery sales could jump to $35 million by 2023 but its market share will fall by 21.5% to 20%.
And it’s true that few companies are choosing to go public during the financial bloodbath that is 2022, especially compared to the record year that was 2021. IPO investors will need to be prepared to hold through significant volatility. Conversely, fewer IPOs could make the Instacart public launch a much more important story than it would have been last year.
Instacart could be using the IPO to generate more cash or to give private investors an off-ramp in the near future. With AmazonFresh, Walmart+, and DoorDash leveraging their customer bases to steal market share, the IPO could be one way to gain further legitimacy.
But equally, it may have simply reached an organic point in its growth story where an IPO is the next logical step.
Instacart filed with the US Securities and Exchange Commission for permission to launch its Initial Public Offering (IPO) on 11 May, intending to go public later this year.