Instacart IPO banks tout e-grocery shopping potential, but challenges loom

Instacart IPO banks tout e-grocery shopping potential, but challenges loom

Instacart, the grocery delivery app, has drawn positive coverage from most Wall Street brokerages, including J.P. Morgan and Goldman Sachs, despite a somewhat subdued initial public offering (IPO) in September. While the stock has traded below its $30 IPO price, brokerages are optimistic about the company’s growth in the online grocery delivery market.

Shares of Instacart, formally known as Maplebear, were down 1% on Monday but remain a focal point of attention among investors. Following the conclusion of the quiet period, at least half of Instacart’s 20 IPO underwriters have initiated coverage with their top ratings.

Brokerages believe that Instacart’s advertising business, coupled with its focus on the higher-margin non-discretionary groceries segment, will drive profitability in the near to medium term. Colin Sebastian, an analyst at Baird, noted that “Instacart requires little capital expenditure to fund operations, with the potential for significant margin expansion.”

However, analysts are not without concerns. Competition in the delivery space from companies like Uber, DoorDash, Amazon, and Walmart is expected to challenge Instacart’s growth in gross transaction value (GTV). Scott Devitt, an analyst at Wedbush, has a price target below the IPO price, citing concerns that the lack of exposure to growing grocery businesses like Walmart and Amazon could lead to share loss for Instacart.

Piper Sandler’s Alexander Potter expressed concerns about Instacart’s comparatively slow growth compared to its rivals. Factors such as reductions in food stamp benefits and a return to in-store shopping may limit GTV growth. Additionally, J.P. Morgan analysts highlighted that the popularity of weight-loss drugs could impact consumer spending on food, potentially challenging Instacart’s growth and profitability.

Despite these concerns, Instacart’s future prospects are seen as promising, and the majority of brokerages are bullish about the company’s potential in the online grocery delivery market. As of the latest data, six brokerages not involved in the IPO have given Instacart an average “hold” rating.

Instacart currently trades at 54.4 times its forward earnings, according to data from the London Stock Exchange Group (LSEG).

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