The Long-awaited IPO of Instacart Will Test the Ceo's Pivot and the Market's Rebound

The online grocery startup, Instacart, has long contemplated an initial public offering, and it is now poised to embark on this journey, marking another significant listing in an apprehensive market. Officially known as Maplebear Inc., Instacart aims to raise up to $660 million on Monday, targeting a valuation exceeding $9 billion, with trading commencing on Tuesday.

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Instacart's timing coincides with the recent successful IPO of Arm Holdings Plc, which surged 25% on its trading debut last week, despite remaining predominantly under SoftBank Group Corp.'s ownership. While Arm experienced a minor dip in its stock price on Friday, it remained nearly 20% above its offering price.

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The potential success of Instacart's IPO may provide a boost to other impending listings, such as Boston-based marketing and automation startup Klaviyo Inc., which has raised its IPO target to $557 million. Additionally, German footwear manufacturer Birkenstock Holding Ltd. is preparing for its own public offering in the coming weeks.

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Drawing inspiration from Arm's approach, Instacart is adopting a cautious strategy by securing substantial backing from prominent investors for its listing. Among its collaborators, PepsiCo Inc., one of its partners, is participating in the offering.

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Furthermore, Instacart has enlisted notable cornerstone investors, including Norway's Norges Bank, TCV, Sequoia, D1 Capital Partners LP, and Valiant Capital Management. This strategic move deviates from the customary allocation of shares in IPOs, potentially positioning Instacart to benefit from a scarcity of available shares when trading commences.

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Established in 2012, Instacart pioneered online grocery delivery, achieving a valuation of $39 billion during the COVID-19 pandemic when it gained widespread recognition among homebound shoppers. However, as the pandemic abated, concerns about higher interest rates and the possibility of a recession weighed on the company. Consequently, Instacart revised its internal valuation three times in the past year, with the most recent adjustment lowering it to approximately $13 billion in October.

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On Friday, Instacart elevated its IPO target price to a range of $26 to $28 per share. Based on the fully diluted equity specified in its filings, this would value the company at between $9.3 billion and $9.9 billion.

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Under the leadership of CEO Fidji Simo, who succeeded co-founder Apoorva Mehta in 2021, Instacart has embarked on a strategic shift, focusing on advertising and technology rather than exclusively on grocery delivery. Leveraging its vast consumer data pool, the company aims to assist grocery stores in boosting their sales.

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Instacart achieved profitability in the first half of the year, aligning with the evolving preference of investors for companies that demonstrate profitability rather than sustained losses. During this period, the company reported a net income of $242 million, in contrast to a loss of $74 million during the same period the previous year. Its revenue grew by 31% to approximately $1.5 billion in the six months ending on June 30, driven in part by robust growth in its higher-margin advertising segment, which is now the second-largest contributor to revenue after the core grocery delivery service.

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Instacart has also increased its profitability per order, with net income as a percentage of gross transaction value rising from a loss of 0.3% in 2021 to a profit of 1.5% in 2022.

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However, the sustainability of this growth, particularly in light of flat order volumes in the first half, remains a pivotal question for investors. The grocery industry, characterized by narrow profit margins, is highly competitive, and Instacart faces the challenge of maintaining its position as a valuable digital partner and advertising platform for retailers, consumer brands, and suppliers.

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PepsiCo's investment is seen as validation of Instacart's pivot under CEO Fidji Simo. Since Simo's arrival from Meta Platform Inc.'s Facebook, the company has expanded its roster of brand partners to over 5,500.

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Goldman Sachs Group Inc. and JPMorgan Chase & Co. lead Instacart's IPO, with participation from Bank of America Corp., Barclays Plc, Citigroup Inc., and 15 other underwriters. Instacart's shares are set to be traded on the Nasdaq Global Select Market under the symbol "CART."

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In addition to providing retail investors an opportunity to invest, the listing will offer current investors in Instacart, including prominent entities like Andreessen Horowitz, Tiger Global Management, and Coatue Management, a chance to exit at a time when exit opportunities for late-stage startups have been relatively scarce.

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