Instacart flips over on US market debut

IFR 2502 - 23 Sep 2023 - 29 Sep 2023
5 min read
Stephen Lacey

Instacart had all the telltale signs of a hot IPO but failed to generate momentum when its shares began trading, opening its debut session on Tuesday at a significant premium only to be a whisker above the issue price by Thursday's close.

The grocery delivery company locked in orders from cornerstone investors before launch and opted to concentrate allocations on the US$660m IPO among existing shareholders, leaving a skinny tail of allocations for other investors.

Goldman Sachs, JP Morgan, Bank of America, Barclays and Citigroup placed 22m shares on Monday at US$30 each, the top of a US$28–$30 range that had been revised from US$26–$28 at launch.

Demand swelled to 25 times the offer size by some accounts, but the bulk of those orders were set to be disappointed thanks to US$400m of cornerstone allocations to Norges Bank Investment Management, TCV, Sequoia Capital, D1 Capital Partners and Valiant Capital Management. PepsiCo invested US$175m through a concurrent convertible preferred security.

The top 25 institutions received 80% of the shares.

Instacart shares soared more than 40% to as high as US$42.95 within minutes of opening on Nasdaq on Tuesday but rapidly reversed course to close first-day trading at US$33.70. During Thursday's session the shares touched US$29.90 before closing at US$30.65.

“Those who got a little stock on the IPO sold after the initial pop,” said one senior banker involved in the offering.

In other words, there weren’t enough investors interested in supporting the stock given the small allocations, with only 20% left to cover the tail of the book and many investors, particularly hedge funds, shut out.

“This is how to reopen an IPO market," said one hedge fund manager. "You start with high-quality assets and focus allocations on large existing shareholders. The same thing happened back in 2017. We put in for Instacart and got very little stock. And we’re fine with that.”

But others felt that the oversized cornerstone tranche led to a lack of engagement. “We knew we weren’t going to be allocated so we didn’t do any homework evaluating the company,” said a second hedge fund manager.

Sequoia and D1 owned a combined one-third stake ahead of the IPO, some purchased at much higher valuations. The IPO valued Instacart at US$10bn, well below the US$39bn valuation where the venture capital firms bought in a US$265m Series I round in February 2021.

Participation of large existing shareholders made the IPO akin to a rights offering, providing them the opportunity to average down their investment cost.

Wobbly cart

Instacart's deal is part of the broader reopening of the IPO market.

The reopening started in June with Cava (38.1% above offer as of Thursday's close) and Savers Value Village (up 9.1%), extended to Oddity Tech (down 20.2%) in July, and resumed in September with Arm (up 2.3%), Instacart (up 2.2%) and Klaviyo (up 9.2%).

All these companies are profitable, and their offerings were supported by cornerstone investors. Aside from Arm, the common complaint from hedge funds is skinny IPOs propped up by existing shareholders.

That has led to a pop-and-drop aftermarket.

Fundamentally, there is nothing wrong with Instacart. Under the leadership of former Meta executive Fidji Simo, the company is now focused on profitability, operates in a huge market and has little need for new money.

In the year ended June 30, the company generated Ebitda of US$472m on revenue of US$2.9bn. That profitability is supported by a growing advertising business and the large number (5.1m) of subscribers to its Instacart+ monthly pay service.

Its core grocery delivery business is now profitable after being subsidised to support growth. The expectation is that Ebitda will reach US$1.25bn in 2025, according to bank forecasts.

There may be further pressure on the stock – or an opportunity for disappointed investors to buy some shares – from the large number of employees looking to cash out.

Of the 22m shares sold, former employees sold 7.9m. Instacart used the bulk of the money raised from its sale of 14.1m shares to settle tax obligations on 63.5m restricted stock units, leaving it with just US$80m of fresh money raised and US$2.05bn of cash.

Large chunks of those RSUs could be sold soon.

After Instacart reports third-quarter results, 11.3m shares are eligible to be sold, but only if the stock trades at a 20% premium – US$36 – to the IPO price for five days in a 10-day test period. Another 3.3m shares vest on November 15, 3.2m more on February 15, and 3.3m on May 15.

That means 14.6m employee shares could potentially hit the market before the end of this year.

With so much stock for sale, no wonder few are queuing up at the checkout.

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Corrected story: Corrects misspelling in 14th paragraph