Instacart: The Sacrificial Lamb

Hello friends

Happy Wednesday. Some may say summer ending is sad, but with football starting tomorrow, hockey in 30ish days, and the Ryder Cup in a few weeks, I could not be more excited. Beyond that, the fall has generally been an exciting time for public and private markets over the past few years, and with an Instacart IPO in the lineup, things could get exciting.

This piece was inspired by the Compound & Friends episode, What Are Your Thoughts? On Tuesday, August 29th.

The Sacrificial Lamb

Instacart’s IPO this fall will be one of the most notable tech IPOs in the last 18 months, and it feels much bigger than just one company going public. How Instacart performs in its debut and following months could help determine the near future of the IPO market. Private companies right now are like a bear that went into hibernation a few years ago. After a few flashy tech IPOs crumbled at the hands of public investors, it seems private companies have been waiting for a sacrificial lamb to test out the waters again.

After this 18-month-long drought in tech IPOs, it doesn’t feel like anyone has any idea how this is going to perform. Most previous Tech IPOs came to the market with high growth and no profitability, in these companies’ debuts, investors loved them. Instacart is coming to the market with a different twist, their growth has seemed to stall, but they have been profitable for the past 5 quarters.

It looks like this IPO will answer two questions:

1. Should more private companies emerge from hiding and go public?

2. Do investors value profitability more than growth?

Should more private companies emerge from hiding and go public?

As I mentioned earlier there are a lot of incredibly valuable private companies that are performing very well, yet have no plans to IPO. That being said, going public is an incredibly large task and the pros have to outweigh the cons. Going public gives you access to much more liquidity and can put you more in the public eye (r/wallstreetbets?), but you also have to deal with the scrutiny and reporting that comes with being a public company. Executives at these companies are estimated to have a least a quarter of their time shifted toward managing investor relations when going public.

Instacart is in a unique position, with two of its biggest competitors already public companies, Uber and Doordash. It is likely that they felt the need to go public in order to match what their competitors are doing in the market.

On a side note, if you have the financial means, my friends over at sandhillmarkets.com allow you to buy stock in private companies. Right now they have active deals in companies like Databricks, Epic Games, and Stripe. This is not an ad, I just like their product and their team.

Do Investors value profitability more than growth?

For one of the first times in recent memory, a tech IPO will be going public as a profitable, but not growing company. In recent years investors have rewarded growth over profitability. It seems in the last year, especially in the private market, people stopped drinking this Kool-aid. Some investors realized, “Oh sh*t companies actually have to become profitable to succeed”.

The main question is, did this mentality shift move over to the public markets? From my lens, public markets have shown small signs of leaning this way. Stocks like Lyft and Lemonade, recent tech IPOs that have never been profitable, are both down over 75% since they went public.

My bet is yes, investors in the public market are now valuing profitability over growth. While this IPO could be hot because of profitability, it is likely on thin ice. Any down quarter or bad guidance will likely result in a double-digit % drop.

Instacart Net Income, showing a profitable last 5 quarters

Instacart’s order volume, stalling over the last 6 quarters.

Final note

No matter what, this public debut is going to be extremely fun to watch. The ripples of the IPO could determine what happens in the private markets over the next few months and years. Either way, we have some interesting times in the private and public markets.

As I said last week, during the job search I am lucky enough to be able to spend a little more time writing. With that, I will see you next week.

-Tom