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Shares in grocery delivery group Instacart jumped 40 per cent at the start of their first day of trading, in the latest sign of investor appetite for new listings.
Strong demand had been expected after Instacart priced its initial public offering at $30 a share, the top of an already-increased price range on Monday evening.
The shares rose 40 per cent at the start of trading on the Nasdaq exchange on Tuesday to $42 per share, valuing the group at $11.6bn based on shares outstanding. They later pared their gains to trade up nearly 30 per cent. On a fully diluted basis, the shares are worth nearly $14bn.
Still, the California-based company has some way to go to regain its peak private market valuation. Investors including Sequoia Capital, Andreessen Horowitz and Fidelity invested $265mn in the company at a value of $39bn in 2021.
Instacart chief executive Fidji Simo told the Financial Times: “There is no doubt that the markets have adjusted pretty dramatically since 2021, however what I am focused on is that . . . we are a much stronger company now.”
The IPO will float just 8 per cent of Instacart stock, raising $660mn. A group of the company’s venture backers including Sequoia and Norges Bank said they would buy about $400mn of shares at the IPO price, resulting in a small free float of just $260mn.
Simo, who took over the business from its co-founder Apoorva Mehta in August 2021, said: “We did not want to dilute the company at the current prices.” She added that Instacart has about $2bn of cash in the bank, so it “doesn’t make sense to raise primary capital” at the far lower valuation.
“When I took over, transaction volume was shrinking and people thought Instacart was a pandemic fad. Two years later we have shown we can grow from Covid gains and do that profitably,” Simo added.
Instacart generated $242mn in profit in the first six months of 2023, up from a loss of $74mn a year earlier.
Alex Frederick, an analyst at PitchBook, said Instacart’s initial valuation “seems low if you compared it to a software company, but is in line if you compared it to other food delivery companies” such as DoorDash or Delivery Hero.
Frederick said he thought Instacart had done a good job of improving its profitability in recent years, though he cautioned that the company could be exposed if inflation remains high or the economy enters a recession.
“Consumers do highly value the convenience offered by online groceries, but as their buying power erodes they’ll look to save costs wherever they can . . . [and] Instacart does have somewhat high fees and product mark-ups.”
The IPO market has been thawing slowly after a period of heightened market volatility and tumbling tech valuations caused activity to freeze last year. Instacart’s listing follows a warm reception for UK-based chip designer Arm, which raised about $5bn last week in the largest IPO for almost two years.
SoftBank-backed Arm’s shares jumped to $63.59 on their first day of trading, up almost 25 per cent from their offer price of $51. However, they have since declined for three days in a row, changing hands for $55.54 at midday on Tuesday.