Instacart: upsized IPO price will not deliver value

The US market for initial public offerings is abuzz. This week, Birkenstock, the German maker of sandals worn by hippies and hipsters, filed to go public. Arm’s IPO was greeted with a 25 per cent first day pop in its Nasdaq debut. Now grocery delivery company Instacart has raised the price range for its own share offering. All three moves are being taken as signs that animal spirits have returned.

But Instacart’s supposed optimism is not quite the triumph that it might first seem.

The San Francisco company said on Friday that it was looking to sell 22mn shares at $28 to $30 each, an increase on its previous price range of $26 to $28. At the top end, the IPO would raise $660mn and value Instacart at $9.9bn on a fully diluted basis.

However, that figure looks far less impressive when compared to Instacart’s internal valuation, which stood at $12bn in May. It is even worse when compared with the $39bn valuation the company touted in 2021.

Then there is the curious matter of the cornerstone investors. Instacart’s prospectus describes Sequoia Capital and D1 Capital Partners as “significant stockholders.” Both parties are also part of a group of cornerstone investors that have agreed to buy up to $400mn of Instacart stock. That would work out to about 60 per cent of the proceeds Instacart is looking to raise if the shares are priced at the top end of the range.

This is an unusual move that seems designed to shore up the stock price. It leaves bookrunners with fewer shares to sell to new investors. It suggests that demand for new offerings is shakier than bankers would like.

US investors can afford to be picky. About 42 per cent of the companies on the S&P 500 are down year to date. This certainly remains a buyer’s market.