Chit Chat Stocks - The Next Great Network Effect Business: Did Ryan Find a New Stock To Buy? (Instacart, Ticker: CART)

Episode Date: May 21, 2025

On this episode of Chit Chat Stocks, Ryan goes through a research report on a burgeoning network effect business hiding in plain sight: Instacart (Ticker: CART). We discuss: (03:10) The Genesis of Instacart (07:20) Building the Marketplace Network (11:08) Understanding the Transaction Mechanics (22:04) Monetization Strategies and Advertising (27:14) Competitive Landscape and Market Positioning (33:08) Consumer Behavior and App Segmentation (41:42) Management Changes and Leadership Concerns (51:14) Financial Projections and Growth Outlook ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* FinChat.io is the complete stock research platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professional's gateway to the world's markets. Interactive Brokers offers commissions starting at $0 on U.S. listed stocks and ETFs with low commissions on other products, and there are no added spreads, ticket charges, or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds, and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83% on instantly available cash

and pay margin rates up to 53% lower than the industry. You can also earn extra income on your lendable shares and IBKR's powerful award-winning trading platform helps every level investor succeed from beginner to advanced on mobile, web, and desktop. When placing your money with a broker, go with a broker you can trust. Make sure your broker is secure

and can endure through good and bad times. We use IBKR here at Chitchat Stocks because it is a phenomenal platform for international investing and you can use them too by heading on over to IBKR.com. Interactive Brokers is a member of SIPC. Welcome to Chitchat Stocks.

On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into another edition of the Chitchat Stocks podcast. My name is Brett Schaefer,

and I'm joined as always by Ryan Henderson. This is another one of our stock research episodes. This week, it is Ryan's turn to discuss a company. I don't know if the name of the stock will be in the title, but we'll get to that in about a minute here. And before we do, quick housekeeping items. Listen to this podcast wherever you get your podcasts on Spotify, apple podcast or youtube subscribe and follow the show to never miss an episode and make sure if you enjoy the episode and you want to help boost our visibility give back if you enjoy the podcast you listen to it on a regular basis we would greatly appreciate a five-star review on either apple podcast or spotify and lastly if you want ryan's comprehensive show notes i'm scrolling through

We're at Google Doc here, and I think it's, yeah, 10 pages of charts, graphics, notes, all sorts of stuff. Subscribe to our free newsletter on Substack. The link to that will be right in the show notes. Ryan, let's get into this episode. I'll reveal the stock. It is Instacart. The first question I have for you, what is Instacart and how have they become the leader in third-party grocery delivery as one of the leading marketplaces in the United States? Yeah.

For the history, Instacart was in many ways sort of your stereotypical Silicon Valley story. There was an Indian-Canadian initially named Apoorva Mehta. He landed a job as an engineer at Amazon in Seattle after finishing school. And like many young developers, he had ambitions to build something of his own. And this was around 2010. So keep in mind, there were a ton of network marketplace type businesses. Think Airbnb, Uber, Grubhub. This was really – it seemed like kind of that generation is when some of the biggest marketplace network effect – or sorry, network type business models really popped up.

Smartphone, hey, adoption was growing in the United States. That's what enabled it. That was the power of the iPhone and I guess at the time Samsung was also huge. Yeah, they were gaining traction quickly. More importantly, I think, they were gaining funding, which was all the incentive in the world for more developers to try to build a model like this. And it was capital light. These models were – they required software. They didn't require any capital intensity.

Prior to Instacart, there were businesses that tried to do grocery delivery, but they went about it with a fulfillment approach first, a network – sorry, like a physical logistics type business model first as opposed to software. And ultimately, a lot of them were not able to do it and they went bankrupt. But Meta had a similar idea of trying to build his marketplace, which was inspired by apparently his own terrible commute to get groceries during the Canadian winters. He would have to get on a bus in certainly below freezing temperatures, go get his groceries, bring them with him on a bus. And yeah, it's just not a pleasant experience. So in 2010, Meta quit his job at Amazon, moved down to San Francisco and pitched his idea at Y Combinator. For anyone who doesn't know Y Combinator, pretty household name around Silicon Valley. And it's basically just helps. I think it's like a pre-seed investment place where you can pitch your idea and you get help building your idea from scratch. You get a little funding as well, and you get the resources of some of the coaches and executives at Y Combinator. And Ryan, did you know at this time – I think at this time – Y Combinator was run by none other than Sam Altman?

I did not know that. Yeah, that's where he began. his meta apurva meta the founder uh his application was accepted in 2012 and the idea that garnered traction was pretty simple so here's a quote from meta in the early days he says instacart is a product where you can order your groceries and get them delivered to your door within one hour what's interesting about this is how we actually make this happen instacart is an entirely software company this means we don't have any warehouses no trucks and We don't hold any inventory.

So when you order your groceries, we have one of the thousands of personal shoppers in our network pick up your groceries from stores such as Whole Foods, Costco, and Safeway, as well as many others, and have them brought to your door within one hour. Pretty clear value prop, I think, for a lot of people. And you kind of do what you can to scrap together shoppers in the early days. And kind of the standard model with these is you hyper locate on a specific geography. So in this case, pretty much like every Silicon Valley business, they started doing this specifically in San Francisco. So you can start to have some sort of market density and actually deliver orders on time. I'm not going to spend too much time on the genesis of the idea because I don't think it's that important today. but I do want to focus on how they actually gain traction because I think when you think about

early stage networks like this one was in 2010, that's really the hard part is getting people onto the platform, getting both sides of the network humming. And so for this part, I'm going to refer to our friend Buyback Capital as I really like what he wrote about it. So here's what he says. The first personal shoppers would text Meta after their orders were completed. In fact, the personal shopper was an unusual hack. From the retailer's perspective, it was just another person walking into their physical location to buy groceries. Long-time cart executives fondly refer to this as ninja shopping. From Instacart's perspective, this was the beginning of aggregating the demand side of the equation without necessarily needing to consult the supply side.

The only hitch with sidelining the retailer, initially at least, was the lack of adequate SKU information to display to customers. This challenge was obviated by cart actually physically going into all the relevant retail outlets and purchasing each individual product, photographing it, and uploading it to the app. This was the beginning of an unusual competitive advantage. They became the only centralized data repository of SKU information across retailers. And so they kind of built up this data advantage where they know what's on the shelves. They have the price points that attracts customers but it was also valuable to the retailers eventually and we'll talk about that here in a second retailers didn't even know like some of the missing stuff

on their shelves uh so they started to rely on them for actual uh inventory management and stuff like that but you think about it they've now got uh inventory and sku information across multiple stores. So if you're a shopper, you're not just going to a grocery store's website to see what they've got, which I don't even know if that was that common back then, but you can actually scan across multiple grocery stores to see which places have the things you need. So this really helped them get customers in the early days. If we fast forward today, Instacart has, they reach about 98% of US households. So pretty much anyone in a metropolitan or near a metropolitan area, they can reach you and they are home to an estimated 8 million customers although i'm not

estimates differ and i don't think instacart really gives out that information at least not regularly in their uh ir materials but they have 600 000 shoppers on their platform so they've done a really good job building out this shoppers network which in turn has attracted customers and the two kind of feed off of one another because the customers are there more and more shoppers are uh willing to join and i'm going to talk about the nuances here but you think about uber how all you you know doesn't take that much to be a driver same with doordash you just got to go pick up an order that kind of thing instacart shoppers are a little different it's a little more i guess hands-on requires some judgment some discernment um and i'll talk about some of those

nuances in a bit well it seems like you've summed up that there are unlike maybe even uber where there's two people there are three stakeholders within this grocery delivery value chain one the shopper to the well there's besides instacart i guess four to the uh the one that's shopping and then three the retailer so for example whole foods a kroger location something like that Now, Instacart, to satisfy everyone, needs to provide value to all three of these stakeholders. How do they do that and how do the mechanics of a transaction on Instacart work? Where do the dollars flow? Yeah, and just a quick correction.

There's really four stakeholders in that there's the shoppers, the customers, the retailers, and the consumer packaged goods brands. They're a big revenue driver for Instacart. And I'll talk about why that is in a second, but the mechanics of the transaction, it's evolved over time a lot. So the, I mean, the core value prop of having groceries delivered to you, that hasn't changed that much, but the way Instacart actually makes money has. So let me run you through a typical transaction. You're a mom, you got some kids, you work a nine to five, and all in all, you're pretty busy. You know, you're running low on groceries, but you don't have time to get the stuff on your own. So you take to Instacart. Once you are on the Instacart app, you pick the store you want to buy items from. Keep in mind, you can browse across multiple stores, but let's say you pick whatever, the closest one. Then you can basically browse that store digitally. So you can browse by

category you can type in the item that you're looking for and start to build your cart i will say i actually i downloaded the app today to like do the research on this and i didn't even think about the fact that it's actually a lot easier to shop through a grocery store this way than to go aisle by aisle looking for the items you want where you can actually just pick them out and at least if it's your first time at a grocery store when you've gone you know where stuff is already but yeah um but at each stage of the digital shopping experience you'll see various discounts so for example i made an account i said i wanted to shop at heb which is any anyone that listens from texas you'll know what heb is but it's the closest big grocery

store near me i chose bakery as a category and i was presented with a number of big goods items that were on sale this is one of the ways that instacart generates ad revenue so it is essentially the modern day, I guess, shopping coupons as well as shelf fees. So there's all throughout the user experience, there's kind of these different advertising channels, but you think about it from a CPG brand's perspective. If there's one item, like in this case, I can't remember the exact brand, but they had some English muffins. I was on the bakery item or the bakery aisle. It instantly shows up priority placement, like get $2 off, you know, six English muffins, whatever from this brand. That's super valuable to the CPG brand,

not to mention it's very measurable. Whereas you might not always be able to measure those outcomes when you're doing like physical shelf fees, physical priority placement in grocery stores. Anyway, I'll continue here. After I filled my cart and checked out, a shopper can then accept the order, much like Uber drivers accept your ride, and start picking out the items at the store to start bringing them to my house. Now, importantly, this is not an entirely hands-off experience. There's a lot of messaging that goes on between the shopper and the customer during the shopping experience. So say you need a substitution. Say there's not the size of the item you wanted, but there's a bigger one. Do you want me to upgrade it to this? There's a whole

bunch of different nuances that the messaging functionality is actually used a lot so you're constantly going and and if you're not like say the person is unresponsive the customer in this case the shopper is going through it the customer who made the order is busy they're not checking their phone the shopper has to make choices like okay this person wanted lactose-free yogurt that's this flavor do i get you know what do i choose as the substitution that kind of thing so it's not just like you can't just fly through it because keep in mind i'm going to talk about this here in a second for the most part shoppers get paid based on tips not based on their uh like payouts from instacart so you want to do a good job and that requires actually uh knowing the stores

knowing the replacements and and kind of taking care of the order but once the shopper has checked out they deliver the items to your door and your bill is based on a number of factors there's a service fee, which ranges depending on location and the number and types of items that are in your cart. There's a delivery fee, which you can get Instacart Plus, which just is like an annual subscription and you get free delivery for a year or whatever. But usually there's a delivery fee unless you have the subscription. And then there's the option to tip. That tipping option incentivizes, as I mentioned, shoppers to do a really good job on the orders. um and so i i've got this little diagram in the uh research report if you want to end up looking

at it but it just kind of goes through the mechanics between the shopper the customer and and ultimately the retailer as well and all the different processes that instacart has built along the way um i ran the girlfriend test which is important for businesses like this because Brad, I don't think you and I always understand the value proposition that clearly. Well, I was going to ask you, you're frugal as well. Did you see the total cost and did it disincentivize you to use it and then drive to the store instead? Or was there a sticker shock at all? Well, I didn't ultimately check out.

I was just kind of doing it to see what the app felt like. And there are definitely pieces to it where you kind of – if you've never really gotten into the nitty-gritty and looked through the app, if you're an investor, you kind of think, why can't Uber or DoorDash just replicate this? But there are various nuances and systems throughout the app that require actually scale to keep efficient. like you know and grocery sk user is wildly more complicated than a restaurant or uh ride sharing yeah exactly and so i yes i ran the girlfriend test and i basically just she she uses instacart or has used it in the past not always um and i wanted to know kind of the value proposition what and i asked her a couple questions and i actually think it's some pretty useful insights so i've run this little q a between myself and my girlfriend i asked why do you use grocery

delivery service in general why do you use a grocery delivery service because i you know you and i we just think just run to the store why pay for the delivery fees and she said honestly sometimes it's out of laziness but typically it's the time savings um if you have a bunch of stuff to do after work you know you need the items it's a little more convenient um and then also So sometimes she said she doesn't have the ability to go. Like if you're on vacation or you don't have access to a car for whatever reason, instead of Ubering to the store, doing it all yourself, taking an Uber back, you just pay Instacart because it's honestly cheaper. Second question I asked was, have you ever used another grocery delivery service? And she said no, as if like she didn't realize there were alternatives, which kind of I think speaks to some of the competitive stuff, which we'll talk about in a second.

And then my follow-up was, would you ever use Uber or DoorDash for groceries? Why are I not? She said, probably not. I feel like the Instacart shoppers are typically more – the sort of standard shopper is like a stay-at-home mom. Yeah, that backs up in the data too. Unlike Uber, which is predominantly male, Instacart shoppers are predominantly female. Yeah, and she said they seem a little more responsible or care more about the order. Whereas the Uber drivers, if you've ever experienced this in an Uber, they're trying to do things as fast as they can, because they just want pure volume, get things done quickly. So there was some, I guess, hesitation around whether or not they'd actually take care of the order, which I think makes a lot of sense.

And then I asked, do you tip? She said, yes, I'm more willing to tip on a service like that as opposed to Uber or DoorDash because it feels like a much smaller – and it is a much smaller percentage of the overall order as opposed to an Uber or DoorDash. So say someone does a really good job. They're texting you along the way. Hey, does this work? Is this a good replacement? They bring it to your door. Everything looks good. It took them 30 minutes in the store, whatever it is. and it's a $200 grocery order or something like that, paying them $15 doesn't feel like the end of the world. If all you bought was a dinner from DoorDash and it's a $50 tab, $15 tip feels a little more extreme. So it's- Yeah, and you're not getting the,

as the analogy goes, the joke, the private taxi for your burrito. It is something that would take you a good amount of time at the store to do within the grocery run. And it's a much larger order. So I think even us, the two more frugal end of the, I guess, shopper spectrum, unlike DoorDash, I can kind of see why if someone doesn't have the time, they would use a service like this. Yeah. Yeah. Honestly, I would guess that time saving is like the number one reason people use the service just because if you're a busy person, you work, you've got a long commute, you've got commitments after work as well. It can be sometimes tough to get – sometimes it's not like your whole grocery haul, but whatever you need, six, seven items, it can help to have someone else do it.

Not to mention there are other kind of tools you can use. There's like expedited delivery. So say someone's like, yeah, I can get this delivered to you by 9 p.m. You want it delivered by 5. You can pay an extra fee for that. There's kind of all these different tools that have been built out over, I guess, now 15 years of trial and error on this app. Okay, let's talk their monetization techniques. Advertising has been a big growth driver for them.

As you're going to get into, they have advertising and other revenue and transaction revenue. Before you talk about it, I want to highlight our friends at FinChat. I'm going to share a screen and the chart before when Ryan talks here. And it is a perfect time to just look at their different KPI segments where Ryan can chart and stack the charts together of both advertising and transaction revenue and see how fast these have grown over time. And then you could also do, which he doesn't have here, but you can just manipulate it. You can do percentage of overall revenue. You can really change the chart. It, speaking of the same value proposition of Instacart, saves you so much time in your stock research.

and I'll stop there, but you can go sign up using our link. The link is in the show notes, finchat.io slash chitchat, get 15% off any paid plan. All right, Ryan, let's talk advertising. Funny enough, kind of a, you know, advertisement right after our advertisement. What is their advertising offering? How has it helped them grow? Who is paying for advertisements? Is it the grocers? Is it the CBG brands? Talk the listeners through it. So the biggest one is the CPG brands, but there is sort of this second level advertising component for retailers as well. But let's just kind of paint a picture. Initially, when they rolled out this concept, the only way they monetized was actually through optional tipping.

So obviously it was kind of run as a loss leader, but it just goes to show that they were able to build a business and attract shoppers purely off of optional tipping in the early days. So it kind of, you know, people get a lot of value out of the service is to say 2020, I think is when they started to roll out their advertising arm. So think it was eight years from founding before they even thought we should start to really lean into advertising. and it's become over i'd say the last five years one of their biggest profit drivers

and so instacart offers kind of a variety of ad destinations for cpg brands and in each destination cpg brands pay to be put front and center in in the user experience so sometimes that's while browsing sometimes it's while searching so like promoted listings in the search uh queries or search uh what do they call them drop downs where you get all the recommendations sponsored listing like amazon correct yeah and then there's even after the order so say you're like uh like when you're customizing your order you can say if they don't have this use this as a substitute and it'll give you a list of substitutes so say you are whatever the a competing english muffin brand i'm going to keep using that example and someone has put in

if they don't have this brand of english muffin you the competitor can say you know put me front and center there so pretty pretty valuable uh ad space i imagine um but this is also it's very measurable that's why you've seen a lot of cpg brands lean into this and then to put some numbers on it advertising and other revenue has more than 10x since pre-covid and the other part in there i believe part of it is at instacart plus but they also have a bunch of b2b services for grocers that i'm going to get into here in a second but they have like inventory management tools advertising products so uh a grocery store can white label an e-commerce storefront from instacart and actually put in their own advertising capabilities so people farmer's market was a great

example of it and talk about a win-win scenario sprouts was trying to get their comp sales up it was stuck in the mud for years they partnered with instacart at first and they part with uber and doordash but i'm sure instacart is the majority given their market share it helped them drive comp store sales and the fact that yeah you're giving some of that transaction value to instacart but But when you're adding more volume and you have, say, 30%, 40% gross margin, it's still gross profit accretive and is helpful for your overall business. Yeah, and some people that are skeptical of this company and the opportunities here say grocery stores are going to try to take this in-house. Instacart is providing value to the retailer in a huge way. Maybe some of the biggest, like Walmart, for example, has done some of these in-house capabilities.

But A, a lot of grocers don't have the resources to do that. But also, it's just not their competency. And the fact that Instacart is able to do it for you is a huge boost. You think about that advertising segment. Grocers in general can get priority shelf fees from CPG brands. Exclude Instacart, the old business model. What do they say? Stack it high, sell it fast, sell it often. Or sell it cheap, sell it often. Um, that's part of it. But the other part is getting those priority shelf fees from the CPG brands. Now the concern was that Instacart is taking that away from you, right? Like Instacart is becoming sort of the middleman there and they're stealing the shelf fees from, uh, that the CPG brands are paying from you. And they're, uh, get basically stealing all that high margin advertising revenue. Now with the white labeling e-commerce storefront, they're giving that power sort of back to the enterprises or to the retailers, in addition to them building out their own ad revenue. But I'll stop there. There's a lot of different ways they advertise. Ultimately,

I think it accounts for roughly 30% of revenue right now. But as you can imagine, much higher margin relative to the pure transaction revenue. Okay, let's talk competition. I know any listener is going to have in their head, well, what about Uber? They have more scale. What about DoorDash? they have more scale. What about Amazon, Walmart, or Costco that keep gaining market share? You have Walmart and Amazon with Amazon Prime, and then I forget what Walmart's is called, but their Prime subscription probably gives you big discounts on grocery delivery. I see those advertisements all the time. What does the competitive field look like for them? How did you analyze it, and do you think Instacart has a competitive advantage or moat? All right, folks, if you are a regular

listener to Chit Chat Stocks, then you know that we use FinChat.io daily. FinChat is the complete financial data platform for stock-focused investors. They have robust financial data on more than 100,000 stocks globally, including company-specific segment and KPI data. So you want to see Amazon's revenue from advertising? FinChat's got it. How about Netflix's subscribers by region. Yep, they've got that too. And they just added Morningstar research reports for all subscribers. So if you are subscribed, you can now get all the latest Morningstar high quality research reports on more than 1500 stocks globally. If you're interested, head on over to finchat.io slash chitchat. All new users automatically get two weeks of FinChat Pro for

free. But if you want to extend to any paid plans, our link will get you 15% off. That is finchat.io slash chitchat. The link will be in the show notes. Yeah, this is probably the area of the investment that I disagree with investors or consensus the most on. So before getting into the moat question, let's put some industry-wide numbers together to give a sense of where Instacart sits. So first off, e-commerce broadly accounts for 14% of total grocery spend in the US. I suspect that number will grow over time, but it's never going to be to the sort of penetration levels of traditional retail just because of the nature of grocery. It goes bad. It really needs to be – I don't know.

A lot of people just do that as sort of an instant shopping thing as opposed to retail seems to be more thought out, traditional retail. The other part I forgot to mention is here's one of the nuances of being a shopper as opposed to an Uber. you have like climate control type stuff in your car. So you want to make sure that everything is staying good, staying fresh so that you can actually go out and fulfill multiple orders or go pick up the stuff and then do it in bulk and then go deliver them in bulk as well. Anyway, that's kind of a sidebar, but just another one of the nuances between being a shopper and say a DoorDash driver. But yeah, so 14% of grocery spend is e-commerce. Of that grocery e-commerce space, Instacart accounts for 19% of the industry, which kind of might make you think like, well, how are they the leader with 19%?

But they are the third largest player behind Walmart, who does everything in-house, Amazon, which I don't really think of them as direct competitors. If you exclude those and you just focus on the third-party delivery providers, Instacart has more than 70% market share. So in terms of grocery delivery, they are significantly larger than Uber and DoorDash. So I think in order to answer the moat question, you have to look at it in two different ways. One, are they advantaged versus other third-party services? Is there sort of a durable advantage that they have? And two, do they provide enough value to prevent grocers from trying to do this in-house? So let's take it one at a time.

First one, are they advantaged versus other third-party services? I see the competition from Uber and DoorDash brought up a ton from investors. And actually, I was reading a recent Morningstar report on them. Shout out to FinChat. You can get that on a subscription, Morningstar reports. And they seem to really care about this a lot. They kept talking about the distribution advantage that DoorDash and Uber have. DoorDash has more than 40 million users. Uber has more than 170 million. So they've got this huge size advantage. I honestly think this concern is way overblown. Despite significant investments from both companies in the grocery space, they're having a hard time migrating

customer habits over to big grocery orders. I think part of this is the shopper base that Instacart has acquired. Frankly, anybody can deliver a DoorDash order. And I'm not saying that fulfilling an Instacart order is the hardest thing to do in the world, but it does require a little more experience a little more know-how some discernment some judgment and experience as a shopper um you know getting to know all those grocery stores takes time think about it on your own habits how much time when you go to a new grocery store how much time do you spend wandering around trying to find stuff it's building up kind of that muscle memory it is why i think grocery stores are underrated businesses if they're run well because someone is going to stick with the

one that they go to because if you go somewhere else it might take you 20 more minutes of than it would at the other one because you have to search throughout the store to find stuff i mean you know it's the type of stuff where instacart can provide a lot of value there not to mention the time saved yeah these are sometimes more than 200 orders i think the average order value on i think they've got that on finchat can check it check my work here brett but i believe it's around like 115 or something like that what's the what's the stat average order value okay um and sometimes it's more than 100 items right so there's very much that personal component the messaging the you know actually getting talking with the customer in the process

and the other part here that i don't really know how to characterize this and it doesn't sound that great when you're talking about a moat, but I think American consumers generally just segment their app behavior. In China and in other parts of Asia, I've heard that there's big super apps where they do a lot all in one place. That just does not seem to be the case in America for the most part. You want a rideshare, you go to Uber. You want a home, you go to Airbnb. You want a grocery delivery you go to instacart yeah i bet there are a lot of people that use uber doordash and instacart and for all different uh like jobs and it's just i think people just tend to segment it that way yeah brett's pulling up the chart here i can't see that final number to say

it's 110 right now interestingly it's kind of declined so maybe they're trying to drive more volume from get some smaller customers within the mixed i don't really know maybe you can know better than me but 110 versus as you mentioned maybe 20 before fees for a restaurant order yeah it's it's just this is much larger basket size and i just think it's hard for i do this too like even my financial habits uh i use like one for a high yield savings account one for a checking one for sending money to and from like there's a you know i could merge all these things into one but i just don't it's i don't know maybe i'm just stuck in my ways but do you kind of see that as well i mean there's no super app that's doing all this that's gained

a ton of traction maybe not for personal finance although i do brokerage i guess in bank i separate but i do agree that in north america it is different i think it's clear in the data there there hasn't been any super apps that have really emerged and uber has tried they haven't really gotten there for example you can look at i think uber owns lime or has some partnership with them apologies for not knowing that but you can order lime scooters now on uber but i'm i've used them and i still download the lime app because i thought oh i need this lime this brand whatever So I agree. And as you mentioned with your survey of one with your girlfriend, the fact that Instacart has that brand cachet of, OK, this is grocery delivery, DoorDash, restaurant delivery, Uber, Rideshare. that is some sort of advantage for instacart where you think doordash can they do grocery delivery

sure but you just don't know or sorry you don't have that initial thought and you might go to instacart with the same value proposition and maybe even better branding because they have better quality control over their shoppers yeah i agree it's we're seeing it so far in the data If DoorDash or Uber randomly starts to really gain traction in the grocery space, I guess I'm wrong, but we're really yet to see that play out. The second question that I think you have to ask is will grocers build this out in-house? I think some will. Walmart has obviously done a very good job in this regard, but I think for pretty much everyone else, it makes more sense to let the delivery providers come to you. Services like Instacart.

Costco maybe too. It's a big part of Amazon, Costco, Walmart. yeah and even i think kroger has done some of this stuff as well like the different kroger stores they're so poorly run that i wouldn't worry about it i would not worry about them yeah i mean you see it with the like they've got the whatever the priority parking where people can bring the orders out to you but there's still no harm in having instacart be able to go through your stores um instacart shoppers it's increasing store traffic and sales volume and the other part is if you're a little smaller sprouts farmers markets may be a good example they've obviously

gotten a lot larger market cap wise in the last few years but instacart provides you those inventory management tools and that white labeled e-commerce storefront that allows you to then have then offer your own advertising to those CPG brands that you already offer to in person, it's giving you a lot of the power back. And then on top of it, let's say you run five stores, 10 stores, 10 grocery stores in a local area. Do you really have the development talent to build this type of functionality out in-house? No. Now, obviously the Walmarts, the Kroger's the Costco's of the world they make up a good chunk of grocery spending but for the smaller players this is super valuable and you I think you'd rather defer to these third

party providers where it's their core competency not to mention they have the resources to do it so I guess long story short I don't think there's some impenetrable moat here like in 10 years if there was another formidable grocery uh delivery app I wouldn't be that doesn't seem like totally out of the realm of possibility but i do think they hold a stickier position in the eyes of all their stakeholders and most importantly customers than a lot of people realize that people just think instacart as the grocery delivery provider so no i would not say there's a huge moat but i think they do provide a lot of value to all their stakeholders which is usually the sign of potential for a moat.

Do you think the moat can widen over the next five years? Yeah, especially if you get retailers using more of the sort of enterprise services. You get great outcomes for CPG brands that are advertising on the service. if if cpg brands are constantly advertising on the service that draws a lot of customers to the platform as well and i just i think ultimately the biggest numbers to track are customers and shoppers which unfortunately they kind of give those out uh i know they drop the shoppers number in the 10k but it's usually rounded but the customers you kind of have to guess or use third-party data for um and as long as those continue to grow which ultimately is going to

be total orders like if they do give out total orders you can track it on finchat if total orders continue to grow i think the moat is widening so and obviously they got to grow at a nice healthy pace but uh so far they have i think total orders grew 14 year over year last quarter which is actually an acceleration over the quarters before it so yeah i think if they continue to prove to customers and shoppers that it's a useful experience and valuable the moat can widen i i don't think it's ever going to be this insanely wide moat like you have with maybe an airbnb where they've collected so much supply because ultimately don't say that ryan that's blasphemy no one likes airbnb's business right now

yeah i just think groceries there's so much power consolidated in a few couple big companies that you can't just like you know uber airbnb they aggregated so many homes and cars and there's no customer concentration risk whereas there's some big contributors to instacart's business so The moat won't, I don't think, ever be quite as wide, but I think they can certainly develop a sticky product and a valuable service, which I think you can do well, even if you can't give this, whatever, five-star moat rating. Some stocks can do well without having a moat. Exactly. If you buy at the right price. And do we talk management or am I about to skip this section?

Management's up next, right? Yeah. Okay. Management can play a role in that. Growth rates can play a role in that. Valuation can play a role in that. These are all very important things we look at when making long-term investments as we try to put the puzzle pieces together.

Talk about management. Talk about the new CEO. And what do you think about her? This episode of Chit Chat Stocks is brought to you by Blue Chippers Club. The club was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. You can break down your portfolios, pitch stocks, receive feedback, talk to other people about their stock ideas, get insights for your own portfolio, and participate in weekly calls with other investors. We love this idea.

We wanted role models when we first started to get into investing, and we think that joining Blue Chippers Club can really help you level up as an investor. bounce ideas off other people, talk with us, talk with many other investors that have joined the network. If you're interested in joining, head on over to bluechippersclub.com and hit apply. The link will be in the description. Yeah. So I was about halfway through my management research when I came across a brand new red flag. So get ready for that. But a little bit of context uh apurva meta the founder led the company as ceo until just prior to its ipo so in i think 2021 he stepped down fiji simo took over as ceo who uh was joined the board like

six months prior and basically a year and a half later they went public i think they came public in 2023 but i believe they filed their s1 like way prior and just because of like poor markets they kept delaying it and then finally went public i'll get to her in a bit but after stepping down as ceo meta initially became chairman but a year later he left the board completely and wanted to pursue other stuff i'm not sure if there was a falling out here or not but he still owns seven percent of the stock and it's single share class so it's not this dual class voting structure anything like that so that he's got no extra voting power but he has been selling a lot lately I don't think he's too important to the story here, but it's worth knowing that if he continues to sell, the only major holder left will be the VC fund.

So there's really no huge insider ownership here. So if that's a big checkbox for you, they don't quite pass on this front. Anyways, on to the current CEO. Fiji Simo spent most of her corporate life at Facebook. She was there from 1,000 employees to 100,000 employees, watched them go public, and was apparently instrumental in the build-out of Facebook's ads business. She's had some commentary on the public calls that I thought was pretty impressive and good, and she lays out the priorities of her ads business in one of those public events. And here are the four levers that she says they're focused on. She says one is getting our current advertisers to spend more, and that comes from continuing to roll out innovations in terms of format.

The second lever is to get more emerging brands to advertise on Instacart. And part of the reason for that is that emerging brands more closely track their advertising or return on ad spend. So they really need measurable outcomes. And because it's a digital platform, they're more willing to spend up on a digital platform like this, especially as a percentage of their own ad budget than you would get with a huge brand. The third lever is penetrating categories that have high investment rate even further. She says, I'll give you a couple of examples. Alcohol, personal care, pets tend to have a much higher investment rate than the rest of the selection because the margins are higher in those categories, I imagine. And then a fourth but smaller lever is actually our investment in offsite through Carrot Ads, where we take our entire ads platform and we make it available on our retailers owned and operated properties so that they can create a retail media business on their own. I think so far, she has done well as a CEO. I mean, we've seen the progression of the ads business. They've gone from, I think, like $50 million in ads to a billion in ad revenue this year. uh as for the pay she gets paid a 1 million dollar base salary and received a big signing package that now after being amended basically states if the stock price hits various price

levels i think up to 86 dollars per share she can receive up to 63 million dollars in performance stock units i think the time frame was supposed to be until 2025 on these and the stock got up to like 53 a share so she made a lot of money this year i think like 45 million roughly uh in performance stock units as i was in the middle of trying to calculate how much she could make i came across news that as of 10 days ago she is also now the ceo of applications for open ai the really i'm seeing you smirk here i was uh i didn't know what your red flag was going to be it i guess i hadn't read your show notes beforehand and it's quite the surprise you confirm this you double check to make sure this is sam altman brag that they have hired her as

ceo and people are speculating that she could be the replacement ceo for sam altman there's no announcement of her stepping down from instacart so for yeah what i understand now she is kind of doing this dual ceo thing which i'm totally would not be cool with as an if i were an instacart shareholder like i don't like that at all this is i think it's fair to say being the ceo of a 10 billion dollar business is a full-time job and now to take on the second CEO role, it's just kind of a huge red flag for me. As for the capital allocation, they've actually done a pretty good job. So over the last two years, they've spent $2.2 billion on buybacks. Keep in mind, they went public in 2023. So stock-based compensation looks insane in 2023,

but it's because of the IPO and all the tricks that go into that. But they've actually reduced the share count by 6% over the last two years, roughly, since the share count normalized. And their multiple has come up a bit over the last year or so. So they've kind of slowed the pace of those buybacks down. But I think that at the time, they were buying it at basically like, I want to say 10 times forward earnings. Like they had a pretty good sense of what they were going to earn, it looks like. The business continued to grow. Investors were very skeptical about this business.

And it was trading, I think, at like two times gross profit. It's now up to around four times. So they did buy back a ton when it was cheap. The stock's up quite a bit in the last year or so, year and a half. So all in all, I think Fiji has done – Fiji is the name, right? Fiji CMO? Yeah. Fiji has done a good job as the CEO so far.

And she has the phenomenal pedigree, like building the ads business at Facebook or at least being a part of that process. If you want this to become a big advertising business, she seems like the right person for it. However, I think it's kind of a deal breaker for me to have her be a co-CEO or like – sorry, a double CEO. So I would like to see some announcement from Instacart in the coming days. I haven't seen anything yet. What's the – yeah, what is your plan? I was going to say I think she's done some podcast interviews. I came way – I listened to those.

I think a while ago, maybe around the IPO time, came away impressed by those. I thought, hey, rock solid leader just seems to have a good, you know, rational head on our shoulders. And the plan seems good. The results seem good. But when you add it and the performance stocking, it seemed like a good incentive program, just driven by, you know, aligned with shareholders there. But this open AI thing may ruin all of it.

yeah and another good thing that i saw was initially her performance stock units were based on market cap intervals which can be uh not always great it's been uh amended to stock price intervals which i prefer over uh market cap but because they can i guess dilute and now they have to be a little more cognizant of it but yeah it bummer like yeah i guess yeah i didn't find this out until like this was announced i think seven days prior to us recording this and instacart has not said anything about it so really i can double check but yeah i checked that 8k or something but maybe i can while you're talking let's talk growth what what do you think earnings can look like in the next five years again we're

putting the valuation puzzle together i think this is yeah the last question or the last section here ryan so talk listeners through your valuation work and how you're looking at the stock today instacart processes about 34 billion dollars in transactions on a last 12 month basis on that they typically earn about a six and a half to seven and a half percent take rate. So that comes out to two and a half billion dollars in transaction revenue. Then they earn an additional one billion dollars in advertising revenue. So advertising, I'm not calculating that into the take rate. If you just look at transaction revenue divided by overall volume, it's around a six and a half to seven and a half percent take rate. Altogether, they currently do about three and

a half billion dollars in revenue. The bulk of shopper payments are tips. So for a marketplace business like this, Instacart actually has really high gross margins, 75% gross margins on a business, on a capital hype business where your shoppers are generating the revenue, shoppers and customers, I should say, are generating the revenue for you is really impressive. So the bulk of their expenses comes in the form of operating expenses. So as you can guess, software business. They spend a lot on sales and marketing, as well as just general talent expenses, hiring developers, general administrative, all that. Ultimately, they generate 24% free cashflow margins, which has grown rapidly over the last

few years, but they pay out about 10% of revenue in stock-based compensation. So right now you're looking at about 14% free cash flow margins minus SBC, which approximates operating margins. You could kind of use those interchangeably if you'd like. But yeah, $800 million in free cash flow, $3.5 billion in revenue over the last 12 months. And that has just continued to grow over the last few years as they've gotten more and more profitable. As for the projections, if we look at post-COVID, which I would have expected to be a totally slow period. They saw, I think their top line 5X'd during COVID, which you would think, okay, there's got to be some sort of a slowdown here, but they continued to grow out of it. Post-COVID, Instacart has grown its gross

transaction value at 10% plus per year. I personally don't see why there would be a big slow down for this now. I've seen a lot of arguments about the competition and potentially grocers taking this in-house, but I simply disagree. And I think that A, e-commerce penetration for grocery will continue to grow on its overall, but Instacart will continue to be the leader there and they still provide, I think, the best service in that space, especially when you're not going like a Walmart or a Costco. Additionally, I don't expect the take rate to change a whole lot unless they do that willingly. If they want to be kind of the lowest cost provider, they want to reduce the service fees or the delivery fees, they can do that, but that would be voluntary. And I assume

they'd only do that if they were making up for it elsewhere. So I suspect revenue will grow in line with overall transaction value. Maybe faster if advertising really starts to pick up speed along with some of the retail software services. But if you get this level of revenue growth, nothing is stopping margins from continuing to expand. So my projection for the next five years are as follows. 10% revenue growth a year. By 2029, they have 20% free cash flow

minus stock-based compensation margins. It's at about 14% today. So a little over one percentage point expansion each year for the next five years. And then I don't think share count will change. It could go up. Basically, they have shown that if the stock is cheap enough, they will buy back with the cash they have at their disposal. So if it's not cheap enough, that means you're kind of going to get the returns on the multiple expansion.

If it is cheap enough, you'll get the share count deduction. So I think it's a safe bet to just say share count doesn't change. I know I'm going through a lot of numbers here. But to sum up, that would mean that in 2029, if those assumptions are right, Instacart would be generating $1.1 billion in – you could call it operating income, but free cash flow minus stock-based compensation. At 20 times, which is just under where they trade today, you'd get a market cap of $22 billion. Today, they have a market cap of $12 billion, so just under a double over five years. Solid returns on what I think are reasonable assumptions. OK, Ryan, and as an update, you got I won't fault you here. You got a 8K tricked without a press release. So there is an 8K. Let's update the listeners on this. That was filed on May 7th of the time that Miss Simo left the company, which she did, I guess. Spoiler.

So it says on May 7th, Fiji Simo, chief executive officers, notified the company of her intent to resign as chief executive officer to pursue another opportunity. The date of Ms. Simo's resignation as CEO is yet to be determined. Ms. Simo will continue to serve as the chair of the company's board of directors. They're conducting a succession plan. So no press release. I wonder who was in charge of that. Probably Ms. Simo. Always funny how they try to downplay bad news.

i guess it's a fine to uh like it's amicable because she's going to stay on as the board of directors but this is a bit of a surprise maybe not as bad as we initially thought there but still add some uncertainty for this business yeah shame on me for not checking the 8k the i mean it was ultimately her being a double ceo or not being there at all kind of has a similar effect where i'd actually say that i was not going to be able to invest in this if the current ceo was a double ceo so this is probably a benefit if anything depending on who they're able to bring in but she was good she was she built this business so well she built the monetization it's a bummer business it's a huge bummer because i thought she was uh did a really good job on the advertising

side of things so yeah that kind of stains it for me a bit and also the fact that she could have gotten i don't know better she could have got a lot of money with the psu payouts the fact that she's just forgoing that makes me kind of i don't know somewhat skeptical maybe she's seen something that we're not uh right growth slowdown or something like that maybe she just got paid and absorbent amount to go to OpenAI. I wouldn't be surprised by that. Yeah, that's also true. All right, let's wrap things up.

Are you buying shares? And how are you looking at the stock on your watch list? I'm still undecided. I really think they have a lot of staying power, much more so than other investors, apparently. I think a lot of people are skeptical that this is like a long-term sticky business that can be the leader for a long time.

But I would have hoped to get a slightly better return under my current assumptions. Basically, that's just to say I wish the valuation hadn't gone up so much in the last year. And now when you sprinkle in the management concerns with it, yeah, I'd like for it to be cheaper. So I'm going to say watch list for now, if it trades at under 20 times EBIT, which I think – And what's it at today? I think it's at 22. Okay. So not too far off. Yeah. It might be more like – yeah.

I believe it's around 22. I would consider a starter position. I really like the business and I could see them growing at an above market rate for quite a long time. All right. That's a good way to wrap things up. For anyone that listened to this full episode, as a reminder, if you want to support the show, if you like the show, give us a five star review on Apple podcast or Spotify. We greatly appreciate that. Follow us on the old Twitter machine and sub stack to get the free newsletter show notes along with this episode. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for listening to this episode. We hope you learned something and got some good insights from this research podcast, and we'll see you next time.

Thank you for watching.