Instacart, the popular grocery delivery company known as Maplebear (ticker: CART), made its highly anticipated debut in the public markets on Tuesday. While its initial public offering was priced at $30 per share, above the expected range of $27 to $29, the stock opened strong at $42 before steadily declining throughout the trading day. By the closing bell, it had settled at $33.70. Unfortunately for Instacart, the downward trend continued on Wednesday morning, with shares falling an additional 6% to $31.65.
Needham analyst Bernie McTernan's recent coverage of the company added further pressure to the stock. McTernan assigned a Hold rating to Instacart without providing a specific price target. According to the analyst, the risks and potential rewards associated with the stock are relatively balanced, primarily driven by a slowdown in growth following a surge in demand during the pandemic. While online grocery sales in the U.S. experienced remarkable growth of nearly 60% per year from 2019 to 2022, McTernan predicts that this rate will decrease to around 12% annually through 2025.
In a research note, McTernan highlighted structural headwinds facing online grocery adoption based on survey results. Despite the company's recent success, it seems that Instacart may face challenges in maintaining its current growth trajectory.
Online Grocery Marketplace Faces Challenges
A recent survey conducted by Needham revealed that a significant 38% of consumers do not plan on utilizing online grocery marketplaces in the coming month. The reasons behind this reluctance can be attributed to several key factors. Firstly, many individuals express concerns about receiving the right products when shopping online. Secondly, there is still a considerable enjoyment associated with physically visiting the grocery store. Lastly, higher costs deter potential online customers.
According to the analyst, those who have concerns regarding quality control or simply prefer the traditional grocery store experience do not feel that the time savings offered by online shopping outweigh the associated costs. This explains the resistance observed in certain consumer segments.
In addition to these challenges, it appears that Instacart's advertising business has reached a point of maturity. As a result, future growth is expected to be more moderate compared to previous years. While CART's ad revenue is projected to outpace the broader U.S. digital advertising industry and grow faster than transaction revenue, it has entered a phase of slower growth.
Furthermore, it is worth noting that post-pandemic online grocery sales in the United States may fall below consensus expectations. Structural obstacles against adoption are anticipated by McTernan, the analyst who conducted the research.
Competition in the online grocery market is also intensifying. Both Uber Technologies and DoorDash have invested in developing their own grocery platforms. Notably, industry giants Amazon.com and Walmart are already active participants in this market segment.
Despite these challenges, it remains to be seen how online grocery marketplaces will evolve and adapt in the face of increasing competition and changing consumer preferences.
Analyst Raises Concerns over Instacart's Competition and Growth
In a recent analysis, McTernan expressed worries regarding the escalating competition and stagnating growth within the market for Instacart. The analyst believes that these factors could potentially lead to an increased level of risk and negatively impact the company's future prospects. Despite this concern, McTernan notes that when compared to other technology companies with lower growth rates but higher profit margins, Instacart's stock appears to be reasonably priced.
