Instacart IPO banks tout e-grocery shopping potential, but challenges loom

By Savyata Mishra

(Reuters) -Most Wall Street brokerages, including J.P.Morgan and Goldman Sachs, kicked off coverage on Instacart with a bullish view, betting on the grocery delivery app's growth amid a shift to online shopping.

Shares of the company, formally called Maplebear, were down 1% on Monday. The stock — following a lukewarm debut in September — closed at $25.57 on Friday, below its $30 initial public offering (IPO) price.

At least half of Instacart's 20 IPO underwriters have initiated coverage with their top ratings after the quiet period ended.

Brokerages expect Instacart's advertising business to drive profitability in the near to medium term, also boosted by its focus on the typically higher-margin, non-discretionary groceries category.

"As a technology company unburdened by inventory or large infrastructure, Instacart requires little capital expenditure to fund operations, with the potential for significant margin expansion," Baird analyst Colin Sebastian wrote in a note.

Incremental growth in the company's gross transaction value (GTV), however, will be challenged by competition from delivery firms such as Uber, DoorDash, Amazon and big-box retailer Walmart, said Scott Devitt, analyst at Wedbush — the only brokerage with a price target below the IPO price.

"Lack of exposure to growing grocery businesses such as Walmart and Amazon could drive share loss at Instacart," said Justin Post, analyst with BofA Global Research, which has a price target of $30.

Instacart's slow growth compared to rivals is a top concern, as a reduction in food stamp benefits and a shift back to in-store shopping could limit GTV growth, according to Piper Sandler analyst Alexander Potter.

J.P.Morgan analysts flagged that the popularity of weight-loss drugs could weigh on consumer spending on food, challenging the company's growth and profitability.

As of Friday, the six brokerages that were not involved in the IPO started coverage with an average rating of "hold", LSEG data showed.

Instacart trades at 54.4 times its forward earnings, according to LSEG data.

(Reporting by Savyata Mishra in Bengaluru; Editing by Shilpi Majumdar)