Connect with us

Published

on

When the Covid pandemic had many Americans declining to go to the grocery store in 2020, sales at online grocery startup Instacart rose 590%, and its venture capital valuation soared to $39 billion. As the San Francisco company prepares to go public this week, the world has changed. And so has Instacart and its deal.

In a twist for an internet-oriented retailer, Instacart’s enterprise valuation in its initial public offering isn’t outlandish: It’s as little as 15 times earnings before interest, taxes, depreciation and amortization charges for the 12 months that ended in June. At the top of the latest IPO price range, the enterprise value would be 16x EBITDA. And in another twist for a sector where the most-common IPO candidates are newly or barely profitable, but growing so rapidly that large profits look imminent, the company will need to rekindle sales growth after a lull in the first half of this year, its first slowdown since the Covid pandemic, Renaissance Capital analyst Matt Einhorn said, whose firm focuses on IPO research and runs an IPO-focused exchange-traded fund.

“They haven’t done anything wrong,” Einhorn said. “That was just a different time.”

For investors, the good news is that Instacart got much bigger during the pandemic, and its profitability is inflecting higher now. The better news may be that its valuation skyrocketed before a private financing that valued the company at a reported $39 billion in 2021 – and then sank as Covid fever waned.

There is some sign that Instacart’s IPO pitch may be working. On Friday, the company raised the price target for its deal by $2 a share, or 7.4% at the midpoint of the old and new price ranges, with Instacart now seeking a value up to $10 billion, according to its latest IPO prospectus update, and a plan to sell shares at $28 to $30 apiece, giving public investors a better shot at a profit. With roughly $2 billion in cash on the balance sheet, the company’s enterprise value would be as high as $8 billion at the top of its IPO range. 

It isn’t the only planned tech IPO of the week to now see some room to up its valuation range, with marketing automation company Klaviyo doing the same.

Low valuation defuses the risk that burned investors in DoorDash, a different Web-fueled food delivery business that went public in December 2020. DoorDash shares closed at $189.51 on their first day of trading, surged to nearly $250, and are now a bit above $80. 

Doordash is a good place to start in evaluating Instacart, according to Einhorn. 

Indeed, the numbers say Instacart is a lot like DoorDash, but at a fraction of the price.

DoorDash, which mostly delivers restaurant meals, posted a net loss in the first half of this year on sales of $4.17 billion, but made $687 million in EBITDA over the prior 12 months, according to its second-quarter report. At today’s stock price, Doordash is worth about $32 billion, about 37 times its EBITDA for the 12 months that ended in June and 21 times its 2024 EBITDA, as estimated by ISI Evercore analyst Mark Mahaney. 

Instacart, on the other hand, has generated $486 million in EBITDA in the last year, including $279 million in the last six months, reversing a $20 million EBITDA loss in early 2022 as economies of scale kick in. Almost three-fourths of revenue comes from transaction fees of about $16 an order, split between the store and the customer, and about 28% comes from advertising. And the company is asking for a valuation less than one-third as high as DoorDash’s, and about a tenth of what DoorDash commanded at its peak.

Instacart’s pitch is that online sales are only 12% of the $1.1 trillion Americans spend on groceries, mostly at stores like Walmart, Kroger and Aldi that are partners with Instacart. The company thinks that share can double, though its roadshow presentation doesn’t say exactly how soon. And, in a nod to growth worries, Instacart is also selling itself as a cash-conscious business that invests carefully, with an eye toward short-term returns, while building up its advertising business to keep building profit even as sales growth slows.

That reflects a hard-won skepticism about Web business models that had been powered by Covid-driven hypergrowth, Einhorn said.

“They won’t do 2020 growth again and probably will grow less than in 2021 and 2022,” he said. 

Industry sources are split on how fast Instacart will grow now, said Third Bridge analyst Nicholas Cauley. More aggressive experts consulted by the New York research firm think Instacart can boost gross sales by almost 20% this year and next, helped by market share gains that can be achieved with higher marketing spending after the IPO, he said. Relative pessimists think sales will grow by a high single-digit percentage.

“They have industry leading selection and the app is good for the user,” Cauley said. 

Indeed, the waning of Covid has tapped the brakes on Instacart’s growth  The company told analysts on its roadshow that the early part of this year was the first period when it did not think sales were inflated by Covid fears, either the original version or the less-intense recurrence driven by the Omicron variant in late 2021 and early 2022.

Gross sales grew just 3% in the first quarter and 6% in the second three months of 2023, down from the 18% average the company posted in 2021 and 2022.  Instacart’s revenue grew 31% in the first half of 2023, however, as it added high-margin advertising sales and other income.

The right valuation for Instacart depends on where the ultimate rate of sales growth falls, Einhorn said. 

In its roadshow presentation, which the company has made public, Instacart projects that its long-term business model will capture between 6.5% and 7.5% of each dollar a consumer spends in service charges and other revenue to Instacart (the rest is passed through to grocery stores who sell on the platform). Another 4% to 5% of gross sales will flow to Instacart in the form of advertising revenue, mostly from consumer products companies.

The company’s plans turn on getting loyal customers who belong to the company’s Instacart+ program, a $99 a year subscription plan that gives free grocery delivery and cash back on some orders, Instacart chief financial officer Nick Giovanni said in the investor presentation. He acknowledges that customers who began shopping at Instacart during Covid have been less loyal than earlier adopters, but said sales to new customers this year are 60% higher than in pre-Covid 2019.

“We expect to see some headwinds,” he said.  

Instacart+ may be the key to the future, according to Cauley. Members shop more often and spend more each time, and larger orders are more profitable because they use workers’ time more efficiently and require less marketing spend. 

“Once customers get on the platform, they tend to be sticky,” he said.

The company’s pitch turns on its ability to boost profits by containing costs as sales grow more slowly. Since its store partners buy and sell the food themselves, Instagram’s cost of goods is about the cost of running its Instacart.com platform, which is essentially a locally tailored marketplace of supermarkets that are its partners, and private-label store sites; and of delivering packages to consumers. 

The company says those costs will dip to just 22% of revenue, from 28% last year and 25% early this year, as it moves toward its “long-term target” levels. Its capital spending is very low, and its corporate overhead and marketing were 53% of revenue in early 2023.  The company believes it can double its EBITDA as a percentage of sales to 39%, according to its presentation.

“When a customer orders more than 20 items, everything about the process is different,” Giovanni said.

Instacart’s prospectus cites market research firm Incisiv as saying the online grocery market will grow between 10% and 18% annually through 2025. If Instacart regains sales growth of 18%, that would work out to 2025 revenue of $5.9 billion, gross profit of $4.63 billion, and EBITDA of $2.3 billion. Including the cash on the company’s balance sheet, that values Instacart at about three times EBITDA – way below DoorDash’s valuation.

At 10% growth in merchandise sales, which Einhorn thinks is closer to the mark, Instacart’s share of that revenue climbs to as much as $2.88 billion in 2025, with EBITDA of about $1.12 billion. Even that would value the company at only seven times 2025 EBITDA, and about 14 times EBITDA from the last four quarters, still a sharp discount to DoorDash. Grocery giant Kroger trades at 13 times net income.

So in a twist few would have predicted in 2020 or 2021, Instacart is trying to go public as a value stock, carefully managed to wring the best results from potentially modest growth. Investors will soon show whether they are buying.

Continue Reading

Technology

Mark Zuckerberg slams Apple on its lack of innovation and ‘random rules’

Published

on

By

Mark Zuckerberg slams Apple on its lack of innovation and 'random rules'

Meta CEO Mark Zuckerberg appears at the Meta Connect event in Menlo Park, California, Sept. 25, 2024.

David Paul Morris | Bloomberg | Getty Images

Meta CEO Mark Zuckerberg slammed rival tech giant Apple for lackluster innovation efforts and “random rules” in a lengthy podcast interview on Friday.

“On the one hand, [the iPhone has] been great, because now pretty much everyone in the world has a phone, and that’s kind of what enables pretty amazing things,” Zuckerberg said in an episode of the “Joe Rogan Experience.” “But on the other hand … they have used that platform to put in place a lot of rules that I think feel arbitrary and [I] feel like they haven’t really invented anything great in a while. It’s like Steve Jobs invented the iPhone, and now they’re just kind of sitting on it 20 years later.”

Zuckerberg added that he thought iPhone sales were struggling because consumers are taking longer to upgrade their phones because new models aren’t big improvements from prior iterations.

“So how are they making more money as a company? Well, they do it by basically, like, squeezing people, and, like you’re saying, having this 30% tax on developers by getting you to buy more peripherals and things that plug into it,” Zuckerberg said. “You know, they build stuff like Air Pods, which are cool, but they’ve just thoroughly hamstrung the ability for anyone else to build something that can connect to the iPhone in the same way.”

Apple defends itself from pushback from other companies by saying that it doesn’t want to violate consumers’ privacy and security, according to Zuckerberg. But he said that the problem would be solved if Apple fixed its protocol, like building better security and using encryption.

“It’s insecure because you didn’t build any security into it. And then now you’re using that as a justification for why only your product can connect in an easy way,” Zuckerberg said.

Zuckerberg said that if Apple stopped applying its “random rules,” Meta’s profit would double.

He also took shots at Apple’s Vision Pro headset, which had disappointing U.S. sales. Meta sells its own virtual headsets called the Meta Quest.

“I think the Vision Pro is, I think, one of the bigger swings at doing a new thing that they tried in a while,” Zuckerberg said. “And I don’t want to give them too hard of a time on it, because we do a lot of things where the first version isn’t that good, and you want to kind of judge the third version of it. But I mean, the V1, it definitely did not hit it out of the park.”

“I heard it’s really good for watching movies,” he added.

Apple did not immediately respond to a request for comment from CNBC.

Continue Reading

Technology

Why Meta had to ‘bend the knee to Trump’ ahead of his inauguration

Published

on

By

Why Meta had to 'bend the knee to Trump' ahead of his inauguration

Jakub Porzycki | Nurphoto | Getty Images

Mark Zuckerberg’s announcement this week that Meta would pivot its moderation policies to allow more “free expression” was widely viewed as the company’s latest effort to appease President-elect Donald Trump. 

More than any of its Silicon Valley peers, Meta has taken numerous public steps to make amends with Trump since his election victory in November.

That follows a highly contentious four years between the two during Trump’s first term in office, which ended with Facebook — similar to other social media companies — banning Trump from its platform.

As recently as March, Trump was using his preferred nickname of “Zuckerschmuck” when talking about Meta’s CEO and declaring that Facebook was an “enemy of the people.”

With Meta now positioning itself to be a key player in artificial intelligence, Zuckerberg recognizes the need for White House support as his company builds data centers and pursues policies that will allow it to fulfill its lofty ambitions, according to people familiar with the company’s plans who asked not to be named because they weren’t authorized to speak on the matter.

“Even though Facebook is as powerful as it is, it still had to bend the knee to Trump,” said Brian Boland, a former Facebook vice president, who left the company in 2020.

Meta declined to comment for this article.

In Tuesday’s announcement, Zuckerberg said Meta will end third-party fact-checking, remove restrictions on topics such as immigration and gender identity and bring political content back to users’ feeds. Zuckerberg pitched the sweeping policy changes as key to stabilizing Meta’s content-moderation apparatus, which he said had “reached a point where it’s just too many mistakes and too much censorship.”

The policy change was the latest strategic shift Meta has taken to buddy up with Trump and Republicans since Election Day.

A day earlier, Meta announced that UFC CEO Dana White, a longtime Trump friend, is joining the company’s board.

And last week, Meta announced that it was replacing Nick Clegg, its president of global affairs, with Joel Kaplan, who had been the company’s policy vice president. Clegg previously had a career in British politics with the Liberal Democrats party, including as a deputy prime minister, while Kaplan was a White House deputy chief of staff under former President George W. Bush.

Kaplan, who joined Meta in 2011 when it was still known as Facebook, has longstanding ties to the Republican Party and once worked as a law clerk for the late conservative Supreme Court Justice Antonin Scalia. In December, Kaplan posted photos on Facebook of himself with Vice President-elect JD Vance and Trump during their visit to the New York Stock Exchange.

Joel Kaplan, Facebook’s vice president of global policy, on April 17, 2018.

Niall Carson | PA Images | Getty Images

Many Meta employees criticized the policy change internally, with some saying the company is absolving itself of its responsibility to create a safe platform. Current and former employees also expressed concern that marginalized communities could face more online abuse due to the new policy, which is set to take effect over the coming weeks. 

Despite the backlash from employees, people familiar with the company’s thinking said Meta is more willing to make these kinds of moves after laying off 21,000 employees, or nearly a quarter of its workforce, in 2022 and 2023. 

Those cuts affected much of Meta’s civic integrity and trust and safety teams. The civic integrity group was the closest thing the company had to a white-collar union, with members willing to push back against certain policy decisions, former employees said. Since the job cuts, Zuckerberg faces less friction when making broad policy changes, the people said.

Zuckerberg’s overtures to Trump began in the months leading up to the election.

Following the first assassination attempt on Trump in July, Zuckerberg called the photo of Trump raising his fist with blood running down his face “one of the most badass things I’ve ever seen in my life.”

A month later, Zuckerberg penned a letter to the House Judiciary Committee alleging that the Biden administration had pressured Meta’s teams to censor certain Covid-19 content.

“I believe the government pressure was wrong, and I regret that we were not more outspoken about it,” he wrote. 

After Trump’s presidential victory, Zuckerberg joined several other technology executives who visited the president-elect’s Mar-a-Lago resort in Florida. Meta also donated $1 million to Trump’s inaugural fund.

On Friday, Meta revealed to its workforce in a memo obtained by CNBC that it intends to shutter several internal programs related to diversity and inclusion in its hiring process, representing another Trump-friendly move.

The previous day, some details of the company’s new relaxed content-moderation guidelines were published by the news site The Intercept, showing the kind of offensive rhetoric that Meta’s new policy would now allow, including statements such as “Migrants are no better than vomit” and “I bet Jorge’s the one who stole my backpack after track practice today. Immigrants are all thieves.”

Recalibrating for Trump

Zuckerberg, who has been dragged to Washington eight times to testify before congressional committees during the last two administrations, wants to be perceived as someone who can work with Trump and the Republican Party, people familiar with the matter said.

Though Meta’s content-policy updates caught many of its employees and fact-checking partners by surprise, a small group of executives were formulating the plans in the aftermath of the U.S. election results. By New Year’s Day, leadership began planning the public announcements of its policy change, the people said. 

Meta typically undergoes major “recalibrations” after prominent U.S. elections, said Katie Harbath, a former Facebook policy director and CEO of tech consulting firm Anchor Change. When the country undergoes a change in power, Meta adjusts its policies to best suit its business and reputational needs based on the political landscape, Harbath said. 

“In 2028, they’ll recalibrate again,” she said.

After the 2016 election and Trump’s first victory, for example, Zuckerberg toured the U.S. to meet people in states he hadn’t previously visited. He published a 6,000-word manifesto emphasizing the need for Facebook to build more community.

The social media company faced harsh criticism about fake news and Russian election interference on its platforms after the 2016 election.

Following the 2020 election, during the heart of the pandemic, Meta took a harder stand on Covid-19 content, with a policy executive saying in 2021 that the “amount of COVID-19 vaccine misinformation that violates our policies is too much by our standards.” Those efforts may have appeased the Biden administration, but it drew the ire of Republicans.

Meta is once again reacting to the moment, Harbath said.

“There wasn’t a business risk here in Silicon Valley to be more right-leaning,” Harbath said.

While Trump has offered few specific policy proposals for his second administration, Meta has plenty at stake.

The White House could create more relaxed AI regulations compared with those in the European Union, where Meta says harsh restrictions have resulted in the company not releasing some of its more advanced AI technologies. Meta, like other tech giants, also needs more massive data centers and cutting-edge computer chips to help train and run their advanced AI models.

“There’s a business benefit to having Republicans win, because they are traditionally less regulatory,” Harbath said.

Meta’s CEO Mark Zuckerberg reacts as he testifies during the Senate Judiciary Committee hearing on online child sexual exploitation at the U.S. Capitol in Washington, U.S., January 31, 2024. 

Evelyn Hockstein | Reuters

Meta isn’t alone in trying to cozy up to Trump. But the extreme measures the company is taking reflects a particular level of animus expressed by Trump over the years.

Trump has accused Meta of censorship and has expressed resentment over the company’s two-year suspension of his Facebook and Instagram accounts following the Jan. 6 attack on the Capitol.

In July 2024, Trump posted on Truth Social that he intended to “pursue Election Fraudsters at levels never seen before, and they will be sent to prison for long periods of time,” adding “ZUCKERBUCKS, be careful!” Trump reiterated that statement in his book, “Save America,” writing that Zuckerberg plotted against him during the 2020 election and that the Meta CEO would “spend the rest of his life in prison” if it happened again.

Meta spends $14 million annually on providing personal security for Zuckerberg and his family, according to the company’s 2024 proxy statement. As part of that security, the company analyzes any threats or perceived threats against its CEO, according to a person familiar with the matter. Those threats are cataloged, analyzed and dissected by Meta’s multitude of security teams.

After Trump’s comments, Meta’s security teams analyzed how Trump could weaponize the Justice Department and the country’s intelligence agencies against Zuckerberg and what it would cost the company to defend its CEO against a sitting president, said the person, who asked not to be named because of confidentiality.

Meta’s efforts to appease the incoming president bring their own risks.

After Zuckerberg announced the new speech policy Tuesday, Boland, the former executive, was among a number of users who took to Meta’s Threads service to tell their followers that they were quitting Facebook. 

“Last post before deleting,” Boland wrote in his post.

Before the post could be seen by any of his Threads followers, Meta’s content moderation system had taken it down, citing cybersecurity reasons. 

Boland told CNBC in an interview that he couldn’t help but chuckle at the situation. 

“It’s deeply ironic,” Boland said.

— CNBC’s Salvador Rodriguez contributed to this report.

WATCH: Meta is returning to free speech tradition, says Facebook’s former chief privacy officer Chris Kelly

Meta is returning to free speech tradition, says Facebook's former chief privacy officer Chris Kelly

Continue Reading

Technology

Apple’s market share slides in China as iPhone shipments decline, analyst Kuo says

Published

on

By

Apple's market share slides in China as iPhone shipments decline, analyst Kuo says

Jaap Arriens | Nurphoto | Getty Images

Apple is losing market share in China due to declining iPhone shipments, supply chain analyst Ming-Chi Kuo wrote in a report on Friday. The stock slid 2.4%.

“Apple has adopted a cautious stance when discussing 2025 iPhone production plans with key suppliers,” Kuo, an analyst at TF Securities, wrote in the post. He added that despite the expected launch of the new iPhone SE 4, shipments are expected to decline 6% year over year for the first half of 2025.

Kuo expects Apple’s market share to continue to slide, as two of the coming iPhones are so thin that they likely will only support eSIM, which the Chinese market currently does not promote.

“These two models could face shipping momentum challenges unless their design is modified,” he wrote.

Kuo wrote that in December, overall smartphone shipments in China were flat from a year earlier, but iPhone shipments dropped 10% to 12%.

There is also “no evidence” that Apple Intelligence, the company’s on-device artificial intelligence offering, is driving hardware upgrades or services revenue, according to Kuo. He wrote that the feature “has not boosted iPhone replacement demand,” according to a supply chain survey he conducted, and added that in his view, the feature’s appeal “has significantly declined compared to cloud-based AI services, which have advanced rapidly in subsequent months.”

Apple’s estimated iPhone shipments total about 220 million units for 2024 and between about 220 million and 225 million for this year, Kuo wrote. That is “below the market consensus of 240 million or more,” he wrote.

Apple did not immediately respond to CNBC’s request for comment.

WATCH: Apple has to do something to justify its runup

Apple has to do something to justify its run-up, says Capital Area Planning's Ethridge

Continue Reading

Trending