Online Grocery Maturity And Higher Labor Costs Will Likely Pressure Long-Term Margins

Catalysts

About Maplebear

Maplebear operates Instacart, a grocery focused technology and logistics platform that powers online marketplaces, enterprise software and advertising for retailers and brands.

What are the underlying business or industry changes driving this perspective?

• As online grocery penetration matures in North America and large basket orders remain the dominant use case, incremental order growth is increasingly reliant on smaller baskets and new use cases where unit economics are thinner. This raises the risk of pressure on long term revenue growth and may limit operating leverage on earnings.
• Retailers testing or adopting price parity and tighter markups in response to heightened competition from Amazon and others can erode take rates on core transaction revenue. This can compress marketplace unit economics and ultimately weigh on net margins.
• Food and beverage brands facing macro uncertainty and changing consumer trends are already moderating spend. If this persists it could delay Instacart’s path to higher advertising penetration of GTV, slow high margin ads and data revenue growth, and cap future earnings expansion.
• Expansion of enterprise offerings, AI solutions and international software deployments increases fixed cost and complexity at a time when the addressable grocery technology budgets may grow more slowly. This raises the risk that revenue lags investment and drags on long term EBITDA margins.
• Regulatory moves such as higher mandated minimum earnings for delivery workers and evolving local labor standards threaten to increase fulfillment costs faster than routing and batching efficiencies can offset. This can pressure contribution margin per order and constrain sustainable profit growth.

Assumptions

This narrative explores a more pessimistic perspective on Maplebear compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Maplebear's revenue will decrease by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.9% today to 13.8% in 3 years time.
• The bearish analysts expect earnings to reach $451.0 million (and earnings per share of $1.91) by about January 2029, down from $505.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $886.0 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.0x on those 2029 earnings, up from 22.8x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 22.8x.
• The bearish analysts expect the number of shares outstanding to decline by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Instacart continues to demonstrate durable demand for online grocery, with seven consecutive quarters of double digit order growth and order frequency rising as customers mature on the platform, which supports ongoing revenue expansion and reduces the likelihood of a sustained top line decline.
• The enterprise technology platform, including Storefront, Caper Carts and FoodStorm, is gaining adoption with more than 350 retailer storefronts and 40 new launches in the first half, creating a high switching cost ecosystem that can drive long term, higher margin software and services revenue.
• A growing and diversified advertising and data business, already delivering over 1 billion dollars in ads and other revenue in the last twelve months and targeting four to five percent of GTV over time, could materially lift net margins and earnings even if marketplace growth moderates.
• International expansion using existing products such as Storefront Pro and Caper, alongside new AI solutions that retailers are actively requesting, opens additional growth vectors that can extend the company’s secular growth runway and support higher future revenue and earnings.
• Disciplined capital allocation, including a 1.5 billion dollar increase to the share repurchase program, strong cash generation and positive unit economics across all basket sizes, provides financial flexibility that can stabilize per share earnings and mitigate downside risk to the share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Maplebear is $36.0, which represents up to two standard deviations below the consensus price target of $50.58. This valuation is based on what can be assumed as the expectations of Maplebear's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $66.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $3.3 billion, earnings will come to $451.0 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $43.91, the analyst price target of $36.0 is 22.0% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.