Instacart (DARE 0.84%) completed its highly 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 food technology company got off to a flying start, initially gaining 40% on the day of its IPO. However, it has cooled significantly in recent months and is now below its IPO price. Here’s what investors need to know Investing in Instacart Stock after the first few months as a listed company.
Hot off the press
The big news from Instacart since its IPO is that the company recently reported its third-quarter financial results. This gave investors insight into the company’s financial performance as a listed company.
Unfortunately, the report was mixed weighed on the share price. On a positive note, the company reported total revenue of $764 million, up 14% from the same period last year. That beat analysts’ consensus estimate of $737 million. Instacart also reported a 120% increase 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 the GTV of customers who joined the platform in 2021 or earlier declined, suggesting it may be struggling to retain customers. The average price per order also began to decline, possibly due to deflation or customers switching to cheaper items.
Meanwhile, Instacart posted a hefty $2 billion loss, representing an impressive 262% of sales. This was primarily due to a $2.6 billion increase in stock-based compensation, which rose sharply in the run-up to the company’s IPO. Adjusting for these impacts, gross profit was $561 million, an increase of 16% year-over-year.
Profitability is an important trend to watch. The company finally achieved profitability last year:
Image source: Instacart.
Earnings growth is critical because increasing earnings per share tends to be key to increasing shareholder value over the long term.
What awaits Instacart?
Instacart expects GTV, sales and profits to continue to grow in the future. CFO Nick Giovanni discussed the company’s long-term growth prospects Third quarter conference call with investors. He noted that the company expects its fourth-quarter GTV growth to remain within the targeted range of 5% to 6%. Meanwhile, transaction revenue is expected to be between 6.5% and 7.5% of GTV in the long term (it was 7.2% in the third quarter). The company also expects to grow its advertising revenue to 4% to 5% of GTV (up from 3% in the third quarter). Add it all up and we get: “Achieving our transactional revenue, advertising and other revenue targets would increase 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,” explained the CFO in the conference call. Since GTV is also growing, sales and earnings are likely to increase rapidly in the future.
Increasing profitability remains a top priority for Instacart. CEO Fidji Simo stated on the call: “We continue to focus relentlessly on profitable growth while remaining disciplined and managing the things we can control to ensure we continue to deliver strong earnings and operating cash flow.” While maintaining profitability While the company’s earnings will decline in 2023 due to increased stock-based compensation costs, this trend is expected to reverse in 2024. CFO Nick Giovanni stated on the conference call that the company expects to be able to “bounce back.” GAAP Full year profitability in 2024.”
Additionally, management takes dilution from stock-based compensation seriously. Giovanni noted on the call that “we have already taken steps to ensure equity-based compensation and reduced dilution.” One way to mitigate the impact of equity dilution is to allocate some of the $2.2 billion cash position that has been built up to use US dollars Buy back shares through a recently established $500 million buyback program (a rarity for a recent IPO).
A stock you may want to add to your cart
Instacart’s stock price has cooled after its initial IPO pop and is now trading below its IPO price. While the food technology company posted a large loss as a listed company in the first quarter, it expects to return to profitability next year. Additionally, the management team is keen to increase earnings per share. The company’s focus on increasing shareholder value rather than growth at any cost makes it one of the most interesting IPOs in recent years. It’s a stock that investors should at least consider adding to their watchlist.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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