Instacart’s high-margin advertising opportunity impresses analysts amid competition concerns

Instacart (NASDAQ:CART) has a unique first-mover advantage over other third-party food delivery platforms and an enticing profitable economic profile, according to analysts at Oppenheimer who have initiated coverage on the recently listed stock with an ‘Outperform’ rating and US$36 price target.

Instacart (NASDAQ:CART) shares traded hands at about $24.80 at midday on Tuesday, below the stock’s debut price of $42 on September 19.

The Oppenheimer analysts noted that, excluding Walmart, Instacart is the largest domestic player in online grocery delivery, with an estimated 26% market share, and it represents 50% of orders less than $75 and 75% of orders above $75.  

It has compelling unit economics, they wrote, with its second quarter contribution profit per order reaching $5.43 compared to rival Doordash’s $1.17.

Further, they highlighted Instacart’s high-margin advertising opportunity.

“We estimate advertising will represent 30% of revenue in 2025, up from 20% in 2020. More importantly, we expect advertising will be the main driver of near- to medium-term profitability,” they wrote in a note to clients.

“Instacart targeting a 4% to 5% long-term advertising investment rate (versus an estimated 2.8% in 2023) compared to consumer packaged goods industry brand advertising at 7% of revenue.” 

Looking for growth catalysts

Analysts at the Bank of America, however, said they were looking for growth catalysts for Instacart before adding the stock to their basket, initiating coverage on the stock with a ‘Neutral’ rating and $30 price target.

They believe the company’s growth rates are already reflected in its valuation.

“We project 5% gross transaction volume growth in 2024 and 31% earnings before interest, taxes, depreciation and amortization (EBITDA) growth to $713 million, reflecting ad growth and cost efficiencies,” they wrote.

“We look for catalysts to accelerate gross transaction volume growth toward sector levels to be more constructive.”

The return to in-store shopping and competition are the top risks for the stock, the analysts wrote.

Several positives

Share gains by Walmart and Amazon could impact Istacart’s growth and market share, with Amazon recently lowering its threshold for free grocery delivery for its Amazon Prime members to $100, they pointed out. 

The BoA analysts did note several positives for Instacart, including an attractive sector opportunity with just 13.5% online grocery penetration, its leading market position with higher-margin large orders, and established profitability with margin expansion potential.

“Grocery is not easy, and Instacart’s large customer base (7.7 million monthly active users), partnerships (1,400-plus retail banners) and operational rigor (estimated 17% third quarter EBITDA margins) position the company to benefit from secular shifts to e-commerce and subscription services,” they wrote.

“Our proprietary survey suggests potential for more usage, as 44% of online grocery consumers use it as their main source of groceries, with 36% using it sparingly and 20% only buying non-perishables.”

Contact the author at emily.jarvie@proactiveinvestors.com

Follow her on X, formerly known as Twitter, @emilyjjarvie