New Services And AI Investments Will Strengthen User Engagement And Maintain Competitive Edge

Key Takeaways

• New services and retail innovations could boost user engagement, order frequency, and improve net margins through strategic pricing alignments.
  
• Investments in AI, technology, and advertising growth aim to enhance customer satisfaction, retention, and earnings, bolstering long-term revenue and competitive position.
  
• Instacart's focus on food and beverage and competition in grocery delivery could pressure revenue growth, while investments in solutions may impact profitability.

Catalysts

Maplebear Inc., doing business as Instacart, engages in the provision of online grocery shopping services to households in North America.

• Instacart is focused on increasing user engagement with new services such as Super Saver, free pickup, and $10 minimum basket, which are expected to drive order frequency and boost revenue.
  
• Retail partnerships like Kroger's in-store pricing and innovations such as EBT SNAP acceptance and digital flyers could lead to higher sales volume and potentially improve net margins by aligning pricing strategies.
  
• The expansion of enterprise solutions, including Caper Carts and storefront technologies, aims to boost retailer sales and maintain Instacart's competitive position, likely enhancing overall earnings.
  
• Growth in advertising revenue, driven by diversified brand partnerships and innovative ad products, could lead to increased earnings as this revenue stream outpaces GTV growth.
  
• Investments in AI and technology to improve inventory management and reduce error rates are expected to enhance customer satisfaction and retention, potentially increasing long-term revenue and profit margins.

Maplebear Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Maplebear's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $642.1 million (and earnings per share of $2.41) by about April 2028, up from $448.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $813 million in earnings, and the most bearish expecting $526 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.5x on those 2028 earnings, up from 23.8x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 24.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Maplebear Future Earnings Per Share Growth

Risks

• Instacart's reliance on a single vertical—food and beverage—exposes it to vulnerabilities from macroeconomic challenges in this space, potentially impacting revenue growth.
  
• The company's average order value is declining, partly due to an increase in restaurant orders with lower basket size, which could pressure overall earnings and profitability.
  
• Instacart’s significant investment in enterprise solutions and partnerships might not yield the anticipated results or could face operational challenges, impacting net margins.
  
• High competition in grocery delivery, despite Instacart being a category leader, could lead to aggressive pricing strategies affecting revenue growth and profitability.
  
• The continuation of investment in affordability initiatives, like reducing thresholds for free delivery, may squeeze net income in the short term if efficiencies and increased volumes do not offset these costs.

Valuation

• The analysts have a consensus price target of $51.786 for Maplebear based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $642.1 million, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $40.22, the analyst price target of $51.79 is 22.3% higher.
• 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.