For the first time in nearly two years, investors had the chance to get in on a major initial public offering. I'm talking about the Instacart (CART -3.48%) IPO, launched in September with the company valued at about $10 billion. But the operation hasn't been an overnight success. Instacart dropped on its second day of trading and has continued to fall ever since, now down 25%.
Meanwhile, the grocery delivery giant recently reported its first batch of earnings as a publicly traded company, and an initial glance offers us some rather positive numbers -- with gains in gross transaction value, revenue, orders, and gross profit based on generally accepted accounting principles (GAAP).. The company even established a share repurchase program, showing confidence in its future. So, should you let the IPO influence you and avoid the stock -- or buy this player after a positive earnings report? Let's dig deeper and find out.
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Let someone else do the shopping
You may appreciate Instacart if you've ever felt like letting someone else do your grocery shopping because this is exactly what the company helps you do. From the Instacart app or website, you choose the store and delivery time, and create your shopping list -- then a personal shopper will do the rest, including delivering everything right to your door.
Instacart partners with 1,400 retailers in about 80,000 locations -- that's 85% of the U.S. grocery market. The company makes money through commissions from retailers, delivery fees, annual memberships, and advertising -- brands can sign up to reach you, the customer, by advertising in the Instacart app.
This model helped Instacart's business soar during the earlier stages of the pandemic, when people across the country favored e-commerce. In fact, the company's valuation doubled in a period of just a few months in early 2021, reaching $39 billion after a round of private funding.
Since, as we saw during and following the recent IPO, valuation has dropped considerably. But it's important to note Instacart didn't enter the market at the very easiest of times. Investors have been wary about growth stocks after the three major indexes entered bear territory last year. Yes, growth stocks have recovered since the start of this year, but in many cases they're well-established companies that have a track record of earnings and stock performance. Investors still may hesitate to get in right away on a stock market debut.
All of this means I wouldn't consider Instacart's market performance so far as a reflection of its quality as a company. For that, it's key to look at earnings figures, and as mentioned above, Instacart's recent report looked promising.
A double-digit increase in revenue
Instacart has seen a slowdown in gross transaction value (GTV) compared to earlier days of the pandemic, but the company noted sequential improvements since the first quarter of this year. And GTV still managed to increase 6% to more than $7 billion in the third quarter. The company also reported a 14% increase in total revenue, including strength in advertising growth. Advertising and other revenue climbed 19%. It's also important to note the net loss in the quarter was driven by stock-based compensation expenses linked to the IPO -- and adjusted EBITDA surged 120% to $163 million.
Now, let's get back to our question: Is Instacart a buy? The stock today trades for only about 5 times forward earnings estimates, which may look like an absolute steal for this market leader -- even if its growth has slowed.
Instacart's headwinds
But there are a couple of headwinds to consider. First, Instacart may be a leader, but it doesn't have a strong moat or competitive advantage that ensures it will remain in the top spot. Today, it faces competition from food delivery specialist DoorDash as well as market giants like Amazon and Walmart. And Amazon recently opened up fresh grocery delivery to customers who aren't members of its Prime subscription service. That clearly could weigh on Instacart.
Second, Instacart no longer benefits from the early pandemic trend of favoring e-commerce, so moving forward, it may not deliver -- excuse the pun -- the same levels of growth seen during that time.
All of this means, at today's price, Instacart makes a reasonable buy, and if the company meets earnings goals, the shares could steadily climb. But this stock isn't the one-stop shop for every investor. I wouldn't expect the company or stock to achieve the tremendous growth of its earliest days, meaning investors interested in high growth may do better to shop elsewhere for their next winning buy.
