Instacart: The Underdog of On-Demand E-commerce

Having spent three years at Swiggy (India’s leading on-demand food and grocery marketplace), witnessing the company's remarkable 5x growth from $2B to $10B, I've developed a deep appreciation for on-demand e-commerce businesses. I firmly believe that these platforms possess powerful self-reinforcing network effects. As seen with Uber and Doordash, these effects intensify over time, yielding significant cost efficiencies and creating a fertile ground for launching new revenue streams. With Instacart’s leadership position in online grocery, I believe it's poised to leverage these self-reinforcing dynamics to drive growth, innovation, and long-term value for shareholders.

Summary:

I’m bullish on Instacart, and expect the stock price to appreciate to $50 in the next 12 months from its current $32.4 level (54% upside). My estimate is based on 11x 2025E Adj. EBITDA, which is a significant 41% discount to the 18.5x avg. trading multiple of closest peers – UBER and DASH. Instacart is a market leader in online grocery, operating a marketplace with ~8M+ monthly transacting customers and ~1500+ retail banners (representing 85+ of the U.S. grocery market). Online grocery remains underpenetrated (~12% of total grocery market) vs other retail categories (e.g. fashion is 20% online, consumer electronics is 66% online), and I believe this penetration could double in the long-term. With a growing customer base, Instacart is well positioned to increase its higher margin advertising revenue by capturing a larger share of the approximately $200 billion CPG ad spend as CPG companies increasingly shift their advertising budgets online, especially amidst challenges in traditional offline ad channels (TV, Print).

Overview of business:  

Founded in 2012, Instacart is the leading digital-first market player in the US online grocery sector, partnering with over 1,500 national and regional retail banners (representing approximately 85% of the US grocery market) to connect them with its 8M+ monthly active customers across various use cases. Instacart has three major business segments - 

1)    Instacart Marketplace: An online platform connecting national, regional, and local retail banners with customers, enabling seamless online grocery shopping and doorstep delivery.

2)    Instacart Enterprise: An end-to-end technology solution that allows retailers to build and run their own custom digital storefronts. It’s a white labeled solution in which Instacart provides the underlying technology, while retailers maintain full control over their online presence, customer relationships, and brand experience.

3)    Instacart Ads: An advertising platform for CPG brands looking to explore alternative marketing avenues beyond traditional channels like TV and print. 

Below is the summary of financials 

 

Investment thesis:

1.     Market leadership in a large, underpenetrated category 

North American grocery spending is approximately $1.6 trillion, with only about 12% occurring online. In comparison, around 66% of consumer electronics, 38% of apparel, and 23% of food services sales are conducted online. Experts estimate that online grocery penetration could reach 20% by 2028. Instacart, a leader among online grocery marketplaces (including Uber, Amazon, and DoorDash), holds roughly 75% market share in orders over $75 and about 50% in orders up to $75. As the market leader, Instacart is well positioned to benefit from more grocery shopping moving online. However, there is still the question of whether Instacart will maintain its position and share in the growing online grocery market. I firmly believe it will.

Instacart primarily faces competition from two major categories of players: offline grocery retailers (such as Walmart, Kroger, and Costco) and digital-first grocery retailers (like Uber and DoorDash).

• Offline Retailers: The risk from offline retailers is that they can set up their own online grocery shopping infrastructure, including an online catalog, app, digital payments, and fulfillment, and stop partnering with Instacart. However, while they can develop an online app and digital payments, handling physical delivery, especially on-demand, will be extremely challenging. Managing on-ground logistics is not their strength, and I don't expect this to change. It’s no surprise that for these offline retailers, 95% of online grocery orders are pick-up orders. I believe that these retailers will continue to partner with Instacart, as it brings incremental business to them without the hassle of managing logistics. 

• Digital-First Players: The competition from digital-first players is more significant, but it's not straightforward. Instacart’s primary value proposition is for the weekly stock-up use case. DoorDash and Uber are scaling their grocery services in a different vertical within the grocery market—just-in-time replenishment of items. Simply put, if you were to order your week's worth of groceries, you would use Instacart. However, if you're cooking dinner and find you're low on salt, you might consider ordering from Uber or DoorDash. Currently, Instacart dominates both market segments. Even with increased competition from Uber and DoorDash, I doubt Instacart’s position will be challenged in the near to mid-term.

2.     Growing advertising business to drive margin improvements

Total CPG advertising spend in 2022 was approximately $200 billion, with 75% still occurring offline. There is a strong shift in the advertising industry towards online platforms, and CPG advertisers will need to follow suit. CPG brands are facing challenges in the traditional linear TV channel, whereas Instacart’s retail media network offers brands attractive ad ROI and targeted, measurable insights. As Instacart continues to grow its base of monthly transacting customers, it will attract new CPG brand partners and enable existing ones to increase their spending. 

I forecast that Instacart will grow its Advertising & Other revenue at a +17% CAGR between 2024 and 2028, with its Advertising & Other investment rate expanding from 2.9% of GTV in 2023 to 4% in 2028. This growth is beneficial for the company because, compared to its core grocery marketplace, the advertising business has significantly higher margins.

3.     Operational efficiency initiatives to drive EBITDA and FCF growth

My experience at Swiggy has shown that as three-sided marketplaces (customers, grocery stores, and Shoppers) scale, significant economies of scale emerge, enhancing the profitability of these businesses. These economies of scale are realized in several ways:

• Order fulfillment efficiencies: As Instacart adds more customers, its area density will increase, meaning Shoppers travel shorter distances to fulfill orders, reducing their fuel costs. Platforms also use granular data to batch deliveries and optimize fulfillment routes. As a result, each Shopper completes more orders per hour, increasing their hourly earnings. Platforms typically share some of these efficiencies with Shoppers to retain them, while keeping a portion to improve EBITDA margins. I expect Instacart to do the same. 

• Increasing demand by adding more use cases: Grocery delivery has a cyclical demand pattern, with most orders placed in the morning (before work) and late evening (after work). Consequently, the delivery fleet operates at full capacity during these peak times but is mostly idle during the afternoon and night, increasing fixed costs for Instacart. Instacart's recent partnership with Uber to deliver food addresses this issue. Food delivery demand typically peaks during the afternoon and night, when grocery demand is low. In my opinion, this partnership will reduce Instacart’s operational costs by better utilizing the delivery fleet throughout the day.

Because of these factors, I forecast that CART's Adj. EBITDA margin will steadily expand from 2% of GTV in 2023 to ~4% in 2028.

Risks:

1. GTV doesn’t grow as expected due to economic headwinds and increased competition 

2. Ads business doesn’t pick up and impacts the margin structure 

3. Top retail partners go fully independent  

 Valuation and comparison with UBER and DOORDASH

Note: The above table represents street estimates for the three companies. The estimates for CART in the above table differ from my estimates.  

I’m bullish on Instacart, and expect the stock price to appreciate to $50 in the next 12 months from its current $32.4 level (54% upside). My estimate is based on 11x 2025E Adj. EBITDA, which is a significant 41% discount to the 18.5x avg. trading multiple of closest peers – UBER and DASH. I believe the discount is warranted given CART’s slower growth profile  vs. peers. Looking at the above table, we see that Instacart (CART), in terms of scale, is significantly smaller than both DoorDash (DASH) and Uber (UBER). CART is also expected to grow significantly slower than both UBER and DASH in the coming years. That said, CART is already more profitable than DASH on Adj. EBITDA basis and narrowly lags UBER.