Instacart is planning for an IPO in September, according to a report from Bloomberg. It would be the latest in a string of companies that have gone public in recent months, such as Cava (CAVA), Savers Value Village (SVV), and VinFast Auto (VFS). Rainmaker Securities Managing Director Greg Martin says the market “has shown some receptivity to new issuances” and that “there’s demand for growth companies.” For Instacart, Martin says, the challenge is “its actual grocery volume… is actually not growing very fast”, noting that the company is actually seeing more growth in ad revenue.
RACHELLE AKUFFO: Well, according to data compiled by Bloomberg, $14 billion has been raised in IPOs on US exchanges. Now that’s down from the record setting $241 billion amount raised in 2021. But IPO activity has been on the rise this year, as the market has been introduced to some popular companies across several industries such as Kava, Savers Value Village, and Kodiak gas services.
Now investors are keeping now an eye on several IPOs from SoftBank’s arm to SpaceX and Instacart. Let’s bring in Rainmaker Securities managing director Greg Martin to talk more about how investors can think about Instacart’s upcoming IPO and what it might mean for the health of the IPO market.
Good to have you on the show here. So let’s first start with Instacart here. Really the timing of coming into this. We know that there were several delays. And there were concerns that the CEO said about an extremely volatile market. So it wasn’t a good time to do it last year. Doesn’t seem like the markets are super stable this year either. So talk about the timing of this.
GREG MARTIN: Well, thank you for having me, Rachelle. You know, Instacart’s an interesting story. It was a company that founded in 2012, soar during COVID of course, as people couldn’t go to grocery stores. And so online grocery really took off.
And they’ve been talking about going public for about three years now as you referenced. And they hired bankers in 2020. They filed in 2022. And the question is, as you point out, is now a good time to go public. I think with the success of some recent IPOs and you mention a couple. And we can add Oddity and VinFast to that list.
The market has shown some receptivity to new issuances. And so I think that’s positive. We’ve seen some clearly rates of stabilize a lot. So it’s a lot better than it was a year ago. And I think there’s a more positive economic outlook than there was previously. And so I do think that there’s demand for growth companies. And Instacart has a little bit of a tricky story because on the one hand, it’s growing due to its growth in its ad sales. But its growth in its actual transaction volume, meaning the value of groceries that are being delivered, actually isn’t growing very much. And so it’s going to be an interesting case study to see just how receptive the market is to new issuances.
RACHELLE AKUFFO: And you raise an interesting point that it really is the ad space that was driving the revenue that they saw. They saw revenue grow more than 30% about $1.4 billion in the first half of this year, according to some reports from the information. But then when it comes to those delivery services, barely budged. So how would they be positioned to say against an Uber in this sort of space?
GREG MARTIN: Yeah, I mean, the company will clearly be comped against DoorDash and Uber as you point out, who’s growth– and if you think about how they think about growth, they think about– for Uber, the total value of cab fare or for DoorDash, the total value of products delivered. The challenge with– because they’re all somehow related on a percentage basis– the challenge with Instacart is its actual grocery volume– and think of Instacart as sort of taking a percentage of grocery volume that you purchase– is actually not growing very fast . Somewhere between 3% and 5%, even though growth is listed at 30% growth primarily because they’re actually growing in ad revenue.
So when people go to the app, brands advertise that people will purchase their goods in the store. And I do think that will go to how much growth potential they have in the future. And I think the market will have a challenge as to do we value the business more on the ad revenue growth, which is actually very high margin and a very good business but may have some caps. Because ultimately the ad business has to be related to how much product can be sold. And so I think it’s going to be interesting to see which one takes over because it is going to be a challenge because they aren’t growing as fast on the GMV side as Uber and DoorDash.
RACHELLE AKUFFO: And as we look at some of the more successful IPOs this year, say a Cava for example, where this is a more premium food brand. People are willing to pay a little bit more for Cava. But then when you think of Instacart and sort of the fees that they tack on there, in terms of what consumers would be willing to pay and their willingness to stick with Instacart, do you get the same feeling that they’ll be as successful as, say, a Cava has been.
GREG MARTIN: It’s an interesting question because I’m probably one of instacart’s biggest customers. I think there’s an Instacart delivery to my house every day. So I have to speak less as a customer and think more broadly because I do think that there is a premium that is paid for the convenience of having Instacart delivered to your home. And now that people are out, going back to work, feeling comfortable going to, grocery stores, I do think that cost can be prohibitive especially as we get– we see inflation. People have less discretionary income.
And so I do think that that’s a factor. And it’s already– it already has hit them. Obviously, they’re not growing the same level they were during COVID. And so– but then but then people start to make the equation of how valuable is their time. There’s a reason why DoorDash is still growing pretty well because people value the convenience versus the cost and the time cost of going to a store. But I do think that Instacart has been more impacted because the premium cost of delivery is starting to impact people.
RACHELLE AKUFFO: And I want to talk more broadly about just quickly the IPO space itself. If we’re keeping an eye on the arm IPO and then Instacart coming, do we get the sense that there is more of an appetite now? Or are the specific sectors that are really going to benefit the most and get the most investor interest?
GREG MARTIN: If you think about an IPO and you think about investor dollars, they’re comparing it to what their alternative is, right? The risk free rate is roughly 5% to 6% depending on what you’re purchasing, if you think about T-bills or Muni bonds as rates have gone up. And so that creates a much higher bar for companies to go public.
I do think that investors are still looking for higher yield. And so they are looking for growth businesses. But I think they’re looking for growth businesses that can also show strong unit economics, strong profitability. And so I think the companies that will succeed are able to show growth but also to able to show that they have a really good profitable business model.
And so I think we’re seeing those types of companies. Oddity and Cava, they have excellent growth potential and solid unit economics. And so I think versus maybe 2021 where anything that was growing almost regardless of whether it had a good business model was well received. I think we’re going to see a much more scrutinizing public. And I expect we will see a titration, meaning a sort of filtering in of companies as– so the underwriters can give IPO buyers who take that risk a little pop. And eventually the floodgates may open if we see more stability and more successful IPO performance.
RACHELLE AKUFFO: We’ll certainly be keeping an eye on that. Appreciate you joining me this morning. Rainmaker Securities Managing director Greg Martin. Thank you so much.
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