What Instacart's IPO filing reveals for Uber and DoorDash investors

Published Mon, Aug 28 20233:14 PM EDTUpdated Mon, Aug 28 20234:41 PM EDT

Instacart's recent initial public offering filing delivered Wall Street some surprising insight into the grocery delivery business and how competitors Uber and DoorDash could better harness advertising opportunities to unlock profit. Last week, the grocery delivery company brought an end to the tech IPO drought when it filed to go public on the Nasdaq Stock Market . According to some Wall Street analysts, the filing revealed a better-positioned company than expected, and one further along on the road to profitability than Uber and DoorDash at the time of their respective IPOs. The biggest contributor: strong advertising revenue growth, coupled with healthy gross margin expansion, logistics efficiencies and higher transaction fees, said Bernstein analyst Nikhil Devnani in a Monday note. "For UBER and DASH, the filing shows that it is possible to make money in the space, particularly given these platforms can cross-sell the vertical to existing consumers (lower CAC) and utilize an existing driver network," he wrote, referring to customer acquisition costs. Long-term advertising opportunity Advertising is proving a major bright spot for Instacart, and that could bode well for Uber and DoorDash if they tap into it effectively. The segment hit 2.8% of gross transaction value in the second quarter of 2023, up from 2.7% in the first quarter and 2.4% a year ago. The filings also revealed a particularly valuable opportunity within the consumer packaged goods business, with advertisers increasing 6% year over year. Bernstein's Devnani called consumer packaged goods brands the most "exciting piece of the Instacart revenue growth story," offering high margins. He referred to this segment as a "massive opportunity" competitors should tap into, since these companies spend about 30% of gross sales on ads. Advertising through DoorDash, Uber and Instacart should also garner more interest as third-party cookies disappear and brands "gain confidence" in the return on advertising spending through those channels, according to UBS analyst Lloyd Walmsley. Filings also revealed insight into customer behavior that both DoorDash and Uber can apply to their budding grocery segments. Data showed that Instacart's newer customers are proving to be bigger spenders than in the past, shelling out 1.6 times more in the first half than this group of users before the Covid-19 pandemic. Users subscribing to Instacart+ also appear to spend significantly more per month on a greater number of orders and tend to shop at twice as many retailers than regular users. This group also contributed to more than half of GTV in the first half. "We think the cohort behavior should bode well for DASH as its DashMart service begins to scale and customers on cohorts on the platform begin to mature," Walmsley wrote, adding that both companies' membership programs have the potential to deliver higher contributions. 'Cautious read-throughs' Despite widespread optimism about the long-term outlook for the grocery delivery business, the filing also revealed some near-term growth concerns for grocery delivery orders. Instacart disclosed flat orders on a year-over-year basis in the first half and noted that customers are buying fewer items or trading down due to inflation. The company also said it expects average order value to lag the 2020 high of $121. Instacart's order and average order value numbers are "cautious read-throughs" for Uber and DoorDash's grocery delivery segments short term, but over a longer time scale cohort behavior, rising ad penetration and subscription users should deliver topline growth, Walmsley said. — CNBC's Michael Bloom contributed reporting.