Due to increasing investor interest for technology services, grocery delivery giant Instacart raised $660 million in its highly anticipated initial public offering on Monday.
The San Francisco firm set its share price at $30, the upper end of its $28-$30 target range. On Tuesday, the stock will begin trading under the ticker symbol “CART” on the Nasdaq stock market.
Despite the frigid IPO market this year, the successful sale shows that software unicorns can still raise significant sums by going public. Based on Instacart’s projections, the company’s worth might drop from $39 billion in a 2021 investment round to $9.9 billion after the listing.
The fact that an IPO can be accomplished at all should give confidence to other digital companies considering going public. Before this week, research firm EquityZen predicted that 2022 will be the worst year for tech IPOs since the financial crisis of 2009.
Last week’s successful IPO by semiconductor designer Arm Ltd. was followed by this week’s successful IPO by online grocery delivery service Instacart, capping a mini-revival of tech IPOs. Instacart increased its anticipated range after the British company Arm set its price at the high end of its range and gained 25% in early trade.
The success of Instacart and Arm’s IPOs may encourage more unicorns to follow suit, providing firms with a further incentive to explore listing as a funding option.
According to Jay Ritter, a finance professor at the University of Florida, “Instacart’s IPO is a big deal because it shows that the IPO window may be opening, even if just a crack, for tech companies to raise capital from public market investors.”
Instacart, founded in 2012, was the first company to offer on-demand grocery delivery using a fleet of independent contractors. The company has survived many of its first-wave delivery competitors, but it has faced backlash over its treatment of its drivers and a recent slowdown in its rate of expansion.
While competitors like Cornershop, which is owned by Uber, gained market share in several regions where Instacart had previously expanded rapidly due to pandemic lockdowns, Instacart’s order numbers leveled off in 2017. In the first half of 2022, orders increased by only 18% over the same period in 2021.
But since 2021, when CEO Fidji Simo (formerly of Facebook) has been at the helm, the company has increased its profit margins by branching out into advertising and business software. Instacart’s revenue increased 39% to $2.5 billion last year, and the company’s net profit more than doubled to $428 million.
“Instacart’s financials demonstrate both substantial growth and an ability to turn a profit, a rare combination for a pre-IPO tech company,” said Jordan Stuart, a tech analyst at Nucleus Research.
PepsiCo’s $175 million investment in Instacart as a cornerstone investor in the company’s initial public offering (IPO) appears to be a vote of confidence. Sequoia Capital, D1 Capital Partners, and Andreessen Horowitz, three of the company’s largest existing investors, have all expressed a desire to purchase an additional $400 million in shares.
Apoorva Mehta, the company’s co-founder and previous CEO, still holds an 11% interest, which is now worth more than $860 million. D1 Capital, with 14%, and Sequoia Capital, with 19%, are two other major winners.
However, analysts warn that Instacart’s route to sustainable growth and profitability is fraught with enormous hazards. As inflation soars, consumers may become reluctant to spend money on luxury items like meal deliveries. As companies like Uber and DoorDash aggressively enter the grocery delivery market, competition is sure to heat up.
Worst of all, Instacart needs to continuously adding features and functionality if it wants to maintain its high valuation. Grocery delivery alone will not cut it in the long run.
“Instacart needs to prove it can diversify revenue and provide retailers unique insights through its data,” said Dan Morgan, senior portfolio manager at Synovus Trust. It’s not simply a simple online delivery service, obviously.
Analysts argue that Instacart will need to expand into other markets, such as the prepared food industry, as well as improve its enterprise services for retailers and marketers if it wants to succeed after its initial public offering. Partnerships with a wide variety of retail chains are still essential.
Nonetheless, the delivery disruptor’s successful IPO is an unmistakable milestone for a business that was previously written off as just another gig play. Instacart, as the industry leader in grocery delivery, is well-positioned to make waves in the IPO market.
“Instacart is no longer an upstart, it’s a leader and innovator in grocery delivery,” Morgan added. The success of the IPO proves that the company’s business plan is viable. However, Instacart must maintain a high standard if it is to fulfill its promise.