About Instacart
Initial public offering (IPO) season is seemingly back up and running as many have turned a bit more rosy on the economy and the public markets have apparently become a bit less frothy, as many private companies nearly went public a couple of years ago, however, decided against it due to the rather tumultuous economic landscape, which is more than understandable.
Now, for whatever reason, private companies are back in the mood to offer shares to the public, which tends to be a great way to raise funds in order to perhaps fund growth initiatives or grow the company in general, not to mention pay down some debt or simply raise the organization’s clout, credibility and prestige around the world.
In recent weeks, chip designer Arm Holdings (NASDAQ: ARM) along with marketing software expert Klaviyo (NYSE: KVYO) and, of course, gig economy-rooted grocery shopping and delivery platform Instacart have made their publicly traded debuts, apparently with other private companies pondering going public as well, some of which reportedly include financial technology and payment processing company, Stripe, specialty payment platform, Klarna, social message board platform Reddit and specialty messaging platform Discord.
But today is about Instacart and if you have been with us for a while now, you know we are anything but foreign to gig economy platforms, especially in the food and grocery delivery spaces, as we have written rather extensively on companies such as Uber and DoorDash, which, oddly enough, have become more and more competitive with Instacart.
Allow us to briefly explain.
Yes, DoorDash and Uber Eats are best known for delivering food from restaurants to your door and Uber itself is best known for transporting people to and fro, but these third-party delivery platforms also have been dipping their beaks into the grocery and broader overall retail delivery segments, with, for example, Uber having the world’s largest retailer in the world, Walmart, on its platform and DoorDash already having partnerships with retailers such as Sprouts Farmers Market, Big Lots and Walgreens, among others.
Obviously, this naturally means some more competition for Instacart, which itself is pretty much DoorDash but just for groceries, as both share the independent contractor structure where consumers can instantly browse the menus and catalogs of stores in their neck of the woods, select items, submit their order and said order is pushed out to drivers that select the order(s) they wish to take, go to the store, pick the items from the shelves and deliver them to your door.
Instacart has notched some strong partnerships with prominent grocers and retailers across the United States thus far, including the likes of Target, Costco, Sam’s Club, Sprouts Farmers Market, PetSmart, Lowe’s, Natural Grocers, Petco, Total Wine & More, Restaurant Depot, Five Below, Best Buy, 7-Eleven, Kohl’s and many, many other prominent retailers.
Additionally, we think it is worth briefly noting that we think there is a massive opportunity for a company such as Instacart to further its presence and competitive advantage in other venues, particularly in the peer-to-peer (P2P) and business-to-business (B2B) realms, perhaps not only having its independent contractors pick up, transport and deliver groceries and other goods from traditional big-box retailers, but also offering its drivers more opportunities and in the process acquiring new customers through a new segment where individuals can sell and send each other food and maybe more practically, kitchen equipment or basically any sort of piece of equipment or item they wish to sell to another individual.
The last-mile delivery can become the only-mile delivery.
On the B2B spectrum, perhaps Instacart could contract with foodservice and equipment distribution companies such as Sysco and US Foods, allowing these companies with already relatively low margins to have their items delivered in a timely fashion and at perhaps a lower cost through outsourcing with a platform such as Instacart.
If you want to go even further outside of the general grocery and food category, other types of delivery companies might even consider contracting with Instacart in order to transport their relatively small goods from, say, distribution center floor to customer’s store, (as this isn’t all that uncommon with other third-party delivery companies at the moment as I myself have seen DoorDash orders delivering parts from Advance Auto Parts to nearby mechanics, which is slightly different than delivering from a distribution center to a store but we still think this is coming, it’s just a matter of when it starts), with, as a brief example, companies such as Cintas or UniFirst that deliver linens and mats to stores, schools and plenty of other venues across the United States could, from our understanding, at least, easily partner with a company like Instacart, having its independent contractors pick up some materials from their laundry centers and transport them to their clients, for likely a fraction of the cost of having their own delivery drivers perform such a task.
Evidently, we think there is a lot of opportunity in this space.
Also, while many have voiced their opinions that the company’s growth is likely to slow following what has so far been the worst of the COVID-19 pandemic (due to less consumers likely ordering groceries online and instead opting to go to the store), we unequivocally disagree with the premise that following the brunt of the Pandemic, less will order from third-party delivery apps, as delivery demand has remained quite resilient for the aforementioned platforms and frankly, it has been our experience that trying to find parking, walking into a grocery store, trying to not fill up your basket too much but ending up filling it up like crazy anyways, waiting in a checkout line and lugging all of the groceries to your car and then carrying them to your humble abode is much more of a pain in the butt than ordering food from your local Greek restaurant and picking it up yourself in a matter of minutes.
To us, this is an unequivocal advantage that Instacart has over its peers, as we ourselves are much more inclined to have someone else pick up our groceries while if we happened to order from a restaurant, we would rather skip the delivery fees and other fees and just order, simply walk into a restaurant and pick it up ourselves, translating into more revenue for Instacart and less for a company such as DoorDash.
Additionally, need we even mention the fact that humans tend to be creatures of habit and therefore once they get into a sort of groove or rhythm, they tend to stick to that regime, as Instacart certainly also saves people the most valuable asset they don’t and never will own, time.
While competition is rising in the space, Instacart has a strong value proposition and we think, prior to looking at any of the company’s financials, admittedly, that it would be silly to assume that the aforementioned third-party delivery companies are going to put Instacart out of business anytime soon.
And with that, let’s dive into some of this newly publicly traded company’s financials so as to determine whether or not Instacart’s stock is worth considering as an investment for now and if it has the potential to please investors later.
Instacart’s stock financials
According to its market capitalization, Instacart is an $7.07 billion company, trading at a share price of $25.57 with no annual dividend issued accompanied by a price-to-earnings (P/E) ratio of 34.54, indicating that this company’s stock (NASDAQ: CART) is objectively overvalued relative to its intrinsic, actual worth, however, this is most definitely one of those instances in which a younger, growth company could justify (primarily through its revenues) paying a premium for the current and future prospects of continued revenue growth and market penetration. We suppose it is just a matter of just how much growth this company is experiencing, that is, if any.
First, however, with respect to the condition of the company’s balance sheet, Instacart’s executive team is in charge of nearly $3.7 billion in terms of total assets and $911 million in terms of total liabilities, which is a wonderful balance sheet snapshot, as even though this company has likely acquired some debt in order to finance its growth, it has kept its total liabilities in a very manageable, serviceable state with its total assets standing much taller than its outstanding debts and other liabilities.
Pertaining more to the company’s recent growth, specifically as a measure of revenue, Instacart’s growth has been mighty visible, with its revenues standing at $214 million in 2019, rising the following year to a whopping $1.47 billion in 2020 (which can more than likely be attributed to the initial onset and shock of COVID-19, forcing many to order their groceries and other items online instead of going to the store), $1.8 billion in 2021 up to its latest displayed figure (on TD Ameritrade’s platform) of $2.5 billion in 2022.
Sure, technically speaking this company’s revenue growth did taper off a little, however, it still grew on a year-over-year (YOY) basis at a considerable rate and it is seemingly safe to say that this was not just a fad or COVID-19-induced trend alone, but a service and platform that many are getting more and more comfortable using, also perhaps growing this company’s revenues through added premium subscribers (reduced and in some instances no fees for said users when they place orders) and it is also worth noting this company’s already prominent yet growing advertising business integrated within its platform might also be adding to this continued uptick in annual revenues.
The revenue picture is quite positive with Instacart in recent history, however, is this company burning through a substantial amount of cash in order to obtain said revenues?
Well, apparently not, at least on the basis of comparison, as according to the company’s cash flow statement, Instacart’s net income has turned quite the cash flow generative corner, with its net income in 2021 sitting below at -$73 million, bolstering to its latest reported figure of $428 million (2022), also flaunting positive total cash from operations during that same year in the amount of $277 million, which, for others within the gig food delivery space, is no small nor simple feat, as DoorDash, for example, has yet to report profitability at all.
Perhaps Instacart’s advertising revenue is playing a considerable role in the company’s positive cash flow, but regardless of reason, we are sure pleased to find that this has been the case recently and we hope this trend continues above the black, allowing it to reinvest some of its excess cash in current initiatives and new improvements and projects as well.
Instacart’s stock fundamentals
Speaking of Instacart’s ability to turn a profit, it is only fitting that the company’s reported (on TD Ameritrade’s platform) trailing twelve month (TTM) net profit margin is impressive, which it certainly is in its own right, however, it is arguably even more impressive with respect to the competition’s listed average TTM net profit margin, which sits at 2.55% whereas Instacart’s stands tall at 25.66%, which, again, is completely and utterly impressive given the competition and its relative margin and TTM net profitability struggles, and given the continued expansion of the company’s advertising business and the fact that it is establishing more partnerships with new grocers, local and national chains, there is a lot of warranted future optimism to be had regarding this company on many fronts, including, of course, its TTM net profit margin.
Onto the company’s TTM returns on assets and investment(s), Instacart’s trump that of the industry’s averages by long shots once again, with, for instance, the company’s TTM return on investment pegged at 27.34% to the industry’s listed respective average of 11.65%.
Instacart has seemingly made some excellent investments in the past and as long as it sticks to its playbook of success, we would expect nothing less moving forward with this company on a returns basis.
Should you buy Instacart stock?
Instacart is rather rare in the sense that it is both relatively young but a profitable leader in its category, grocery.
Young in terms of years (founded in 2012) but when taking a gander at its core financials and other related metrics and ratios, there’s hardly any comparison to be made as it practically has asserted itself into its leadership position in relation to other prominent, successful delivery platforms.
Yes, on the basis of the company’s current price-to-earnings (P/E) ratio, Instacart’s shares (NASDAQ: CART) are overvalued, however, relative to the stickiness of its consumer platform, the growth of its advertising platform and more and more folks opting to have their goods (whatever they may be) delivered to their doorstep instead of going out themselves and taking what is usually a wretched, stressful trip to the grocery store, paired with its historical growth, we think a premium is warranted given its proven execution and the opportunities to come for this company and those that use its platform, both independent contractors and consumers.
Its balance sheet is in pristine condition, its revenues are growing, it is cash flow positive this early on in the game by an impressive margin, its TTM net profit margin runs laps around the competition, on average, and its core TTM returns are impressive as well.
Hence, the “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.