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CART aims to secure $594.0 million by offering 22 million shares, with 36% being secondary shares, priced between $26 and $28 each. Cornerstone investors are set to buy shares worth $400 million in this offering, which constitutes 67% of the deal. Gross proceeds to the company are estimated to be $380.7 million and $351.7 (after fees and overallotment). Additionally, PepsiCo has committed to acquiring $175 million in redeemable convertible preferred stock through a simultaneous private transaction. If priced at the midpoint of the proposed range, Instacart's total market value, when fully diluted, would be approximately $8.9 billion, and a pot deal fully diluted EV of $6.3 billion. This implies that the company is valued at Hedgeye estimates of 1.9x 2024 sales and 10.9x 2024 EV/EBITDA. The company anticipates that up to 1% of the shares sold during the IPO will be available to retail investors via platforms like SoFi and Robinhood. There's a strong possibility that the deal size could significantly increase, but the company does not need the cash because it is FCF positive.
What is Instacart:
- Instacart was founded in 2012 with the vision of transitioning the grocery industry to the digital realm and streamlining the grocery shopping experience.
- The San Francisco, CA-based company booked $2.9 billion in revenue for the 12 months ended June 30, 2023.
- The company prioritized consumer demands, subsequently developing advanced technologies to aid retailers in addressing these demands.
- Instacart's mission is to empower retailers, irrespective of their size, to thrive in both online and brick-and-mortar environments.
- Currently, over 1,400 various national, regional, and local retail banners (80,000 doors), accounting for more than 85% of the U.S. grocery market, collaborate with Instacart.
- The company's Gross Transaction Value (GTV), an indicator of the online sales they facilitate for their partner retailers, has shown impressive growth, with a Compound Annual Growth Rate (CAGR) of 80% from 2018 to 2022. In comparison, the online grocery market grew by 50%, and offline grocery grew by just 1%.
- In 2022 alone, Instacart generated around $29 billion in GTV, establishing itself as North America's foremost grocery technology enterprise.
- It plans to list on the Nasdaq under the symbol CART. Instacart filed confidentially on May 11, 2022.
How Instacart Makes Money:
- Volume Incentives for Brands: Instacart partners with various brands to promote their products. In return for better visibility or promotion on the Instacart platform, these brands pay Instacart a fee to drive larger online sales volumes for these brands.
- Commissions: For each order processed through its platform, Instacart charges a commission (typically a percentage of the order's total value.)
- Advertising Revenue: Similar to the volume incentives, brands can pay to advertise or highlight their products on the Instacart platform, which means their products might appear at the top of search results or be featured in special promotional sections, leading to increased sales for those brands.
- Subscription Service (Instacart +): Consumers can subscribe to Instacart Express, which offers benefits such as free delivery on orders over a certain amount.
- Value Proposition for Grocery Stores: Instacart provides grocery stores with a digital platform to compete more effectively online. As e-commerce becomes more prevalent, especially in the grocery sector, stores that might not have the infrastructure or resources to create their online shopping platforms can partner with Instacart to access a ready-made system. This partnership benefits both parties: grocery stores can expand their online presence and reach, while Instacart gets a broader product range and customer base. Instacart's business model is multi-faceted and built on partnerships with brands and grocery stores and direct relationships with consumers. CART's primary goal is to make online grocery shopping seamless, efficient, and beneficial for all parties involved.
Some brief takeaways from the S1:
- Strategic partner for Grocery -The grocery business is the largest retail category and a $1.1 trillion industry in the U.S., with only 12% of online grocery sales. Instacart self-identifies as a "grocery technology company" and emphasizes its significant investment in technology tailored to drive online grocery sales. The company highlights that its top 20 retail partners saw Instacart contributing 5% of their sales in 2022, an increase from 0.6% in 2018. It should be noted that the company is pointing out instances where retailers have previously opted out of exclusive agreements. "As I write this, a massive digital transformation is underway in the grocery industry, as even more people shop online, online penetration could double or more over time." Instacart CEO Fidji Simo
- Slowing Order Growth - I suspect some investors will express concerns regarding Instacart's core grocery delivery segment. The number of orders remained stagnant (+0.5% YoY) in 1H22. Total GMV of grocery purchases increased by a mere 4%, a small growth, especially considering the prevailing high inflation.
- Low take rate, but it has advertising model - The S1 emphasizes the inherently low-profit margins in the grocery sector. From a $110 order, Instacart earns just $7, indicating a 6.3% "take rate" compared to DASH at 13% (2Q23). DASH does not have a thriving advertising segment, which adds an average of $3 in revenue to CART every order. The company's advertising revenue grew 30% to $740 million last year in 2022 and 24% in 1H23. The company has developed behind-the-scenes technology, taking advantage of the volume of consumer data it collects to help grocery stores sell more and sell that data to advertisers.
- Consumer spending is slowing but entering a seasonally strong period - Instacart is slowing consumer spending in online grocery, as indicated by customers opting for fewer and cheaper items in their baskets. Despite the current trend, Instacart expects some primary metrics, such as orders and transaction volume, to pick up pace after going public. The company typically observes a surge in order volume during the latter half of the year, particularly during the back-to-school and holiday seasons.
- Lockup exception – Insiders can sell 35% of their shares before the lockup period ends (6 months) if the stock price rises by 20% from the IPO price for at least five trading days.
