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Instacart may have outgrown its pants.

This San Francisco-based grocery delivery unicorn doubled its sales in 2020 as millions of homes avoided supermarkets during the Covid-19 outbreak. This once-in-a-lifetime event added to Instacart’s already impressive growth story and excited many investors that they had found the Amazon of grocery delivery.

But this week, the company proactively slashed its own valuation by almost 40% to $24 billion to adjust for difficult market conditions. Instacart’s most recent funding round in 2021 had valued the company at $39 billion, roughly the market cap of consumer goods giant General Mills.

With the easing of pandemic restrictions and the dramatic drop in Covid-19 case numbers, investors have lost love for stay-at-home stocks. It’s been a miserable time for Zoom (ZM) and Peloton (PTON), and these names’ struggles underscore how companies that have thrived during lockdown will have a hard time transitioning to a more normal market.

Instacart continues to talk about an initial public offering (IPO) as the ultimate goal, but it could be a while.

“I want to attract investors who understand this long-term vision and understand what we’re trying to do, and so there’s no rush,” Instacart CEO Fidji Simo said at a recent conference.

The case for Instacart’s IPO

If you believe grocery delivery services like Instacart are part of our online shopping future, there are solid arguments that put the company’s recent troubles into context.

In 2019, Instacart was responsible for just under 11% of e-commerce grocery sales, according to eMarketer. A year later, this proportion doubled to almost 22%. This growing segment of the market helped Instacart’s grocery sales triple in a year, from $7 billion

At this point, the story is fairly familiar: Social distancing and Covid-19 concerns have forced massive changes in the shopping habits of many Americans, who have gone from strolling the aisles of their local stores to tapping buttons on their cell phones to get groceries delivered her front door.

The pandemic has boosted Instacart’s business even though the company had already enjoyed a decade of steady growth. The company’s revenue grew steadily throughout the 2010s before jumping from about $735 million in 2019 to $1.8 billion in 2021, according to Microsoft’s Business of Apps estimates.

But Instacart has its sights set on companies that go well beyond just grocery delivery. Its success rests on improving the shopping experience through technology, and this mission could take the company in very profitable new directions.

Amazon.com Inc. (AMZN) has begun bringing technology to Whole Foods Market stores that will allow its Amazon Prime customers to simply grab the products they need and walk out of the store — the system will automatically charge them. But few retailers have the necessary technical skills to develop or implement such systems themselves, which represents a tremendous opportunity for Instacart.

In late 2021, Instacart acquired an artificial intelligence startup called Caper AI, showing how it could bolster its business by providing shopping technology to other retailers. Caper AI is developing an “intelligent” shopping cart equipped with computer vision and AI. The shopping cart recognizes products as they are added to the cart and automatically bills shoppers for their purchases.

“[W]With advances in fast delivery and click-and-collect capabilities, consumers’ grocery choices will be driven not only by price but also by convenience,” according to a 2021 analyst note from eMarketer.

The case against the Instacart IPO

There’s no doubt that even at its discounted rating, Instacart has become an ecommerce force to be reckoned with. However, the question for potential future investors is how much more can it grow?

The stock market performance of four other publicly traded pandemic darlings provides a very cautionary tale.

  • door line (HYPHEN). This food delivery company skyrocketed through the end of 2021, but its stock has fallen more than 50% since November 2021 as the pandemic eased.
  • Shopify Inc. (SHOPPING). Shares of this Canadian e-commerce tech provider have fallen nearly 60% since November 2021.
  • zoom. If your business becomes a verb, it could be a very good sign for business. Despite being one of the biggest tech beneficiaries of the pandemic, ZM is down 56% over the past year.
  • peloton. PTON’s debut as a public company came months before the lockdowns, when its shares traded in a range between $20 and $30. At the height of lockdowns, Peloton was valued at $150 per share — but in an amazing reversal, it’s back around $20-$30 today.

These market reversals illustrate why Instacart’s leadership took the very unusual step of lowering its own valuation — and also suggest why now isn’t the right time for the company to aggressively seek an IPO.

All four of the above names have seen massive gains thanks to their ability to offer their customers goods and services to improve pandemic-related lifestyles at home. Today, the market is unimpressed by their post-pandemic game plans.

There’s no guarantee that Instacart is in the same boat with these stocks. But being a pandemic stock in a post-pandemic world isn’t the only hurdle Instacart faces. There’s also the Federal Reserve to consider.

The Fed’s big move to tighter monetary policy was the main reason why stock markets suffered in early 2022, with the brunt of the losses being borne by high-flying tech companies.

While markets have leveled off, technology companies trading with expectations of rapid growth fueled by cheap financing continue to struggle. That’s because the Fed is likely to hike short-term interest rates to around 2%, making it even more expensive to fund companies that could be years away from profitability.

Should You Invest in Instacart’s IPO?

There’s no doubt that digital grocery is here to stay. The question is: how much will Instacart actually benefit?

For example, eMarketer projects that Instacart’s grocery sales will grow to $35 million by 2023, a nearly 50% increase from 2020. At the same time, however, Instacart’s share of those sales is expected to fall from 21.5% to 20%.

So while people are increasingly using their phones to buy bananas, they may just be using different apps to do so.

In order to diversify its business, Instacart announced that it intends to generate more revenue from digital advertising. It’s also trying to improve its core service by increasing speed: it’s trying to get food delivered to your door between 15 and 30 minutes.

How well it can meet those goals and whether doing so would significantly improve its profitability remains to be seen.

Investors should always be cautious with IPO and pre-IPO companies. Even if Instacart struggles out of the gate before it ultimately prevails, you’ll need to have the physique to hold out for the bumpy ride.

bets on the New New things are never easy.

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