Instacart Braces for Volatility as IPO Lockup Period Nears End

Instacart, the grocery delivery giant, is poised for a potentially tumultuous week as it approaches the end of its IPO lockup period on February 15th. The anticipation surrounding this milestone has already manifested in share price fluctuations, with a notable 8% drop during midday trading on Wednesday following the release of its fourth-quarter earnings report.

The report revealed a concerning trend: consumers are tempering their spending on groceries amidst rising costs, leading to a slowdown in order growth. Despite an initial downturn, shares managed to recover slightly by the end of the trading day, closing down nearly 2%.

Arun Sundaram, an analyst at CFRA, warned of potential volatility ahead, advising investors to exercise caution. Sundaram’s sentiments echo concerns about the current market conditions and Instacart’s performance, prompting a sell recommendation from CFRA.

In anticipation of the lockup period expiration, Instacart has taken preemptive measures. The company announced an increase in its stock buyback authorisation by approximately $500 million, bolstering its repurchase capacity to approximately $930 million. Analyst Doug Anmuth of JPMorgan, who maintains an Overweight rating on the stock, highlighted Instacart’s strategic move to mitigate potential sell-offs, particularly by affiliates holding approximately 120 million shares.

However, Instacart remained tight-lipped on the impending lockup period expiration, declining to comment on the matter.

The Q4 earnings report, while largely in line with expectations, underscored a notable deceleration in growth compared to the pandemic-induced surge witnessed in previous quarters. Order volume increased by a modest 5% year-over-year to 70.1 million, significantly lower than the 10% growth recorded in Q4 2022. Gross transaction value (GTV) saw a marginal 7% increase to $7.9 billion, driven primarily by inflationary pressures on grocery prices.

Despite the subdued performance, Instacart remains optimistic about future prospects, projecting a further uptick in GTV to between $8 billion and $8.2 billion in Q1, marking the fourth consecutive quarter of accelerating growth.

However, industry analysts like Sundaram caution that Instacart’s business model may face challenges ahead. With consumer spending on the decline and a sluggish food landscape, sustaining growth momentum becomes increasingly precarious. Potential headwinds such as food price deflation and heightened competition in a promotional environment pose additional risks to profitability.

Moreover, the unexpected departure of three executives – chief operating officer Asha Sharma, chief technology officer Varouj Chitilian, and chief architect JJ Zhuang – has raised eyebrows among investors. Sundaram noted that the restructuring came as a surprise, particularly considering Instacart’s recent IPO, and is likely to fuel speculation about the company’s internal dynamics and leadership stability.

As Instacart navigates through this pivotal period marked by market volatility and internal changes, investors remain watchful, assessing the company’s ability to adapt to evolving market conditions and sustain its growth trajectory amidst mounting challenges.

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