Over the past six months, Instacart’s stock price fell to $42.20. Shareholders have lost 7.4% of their capital, which is disappointing considering the S&P 500 has climbed by 9.3%. This may have investors wondering how to approach the situation.
Following the pullback, is now the time to buy CART? Find out in our full research report, it’s free.
Why Are We Positive on CART?
Powering more than one billion grocery orders since its founding, Instacart (NASDAQ: CART) is an online grocery shopping and delivery platform that partners with retailers to help customers shop from local stores through its app or website.
1. Elite Gross Margin Powers Best-In-Class Business Model
A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.
For online marketplaces like Instacart, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.
Instacart has robust unit economics, an output of its asset-lite business model and pricing power. Its margin is better than the broader consumer internet industry and enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 74.1% gross margin over the last two years. Said differently, roughly $74.11 was left to spend on selling, marketing, and R&D for every $100 in revenue.
2. EBITDA Margin Reveals a Well-Run Organization
Investors frequently analyze operating income to understand a business’s core profitability. Similar to operating income, EBITDA is a common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of profit potential.
Instacart has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 28.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
3. Increasing Free Cash Flow Margin Juices Financials
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Instacart’s margin expanded by 12.5 percentage points over the last few years. This is encouraging because it gives the company more optionality. Instacart’s free cash flow margin for the trailing 12 months was 22.9%.
Final Judgment
These are just a few reasons Instacart is a high-quality business worth owning. With the recent decline, the stock trades at 7.6× forward EV/EBITDA (or $42.20 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.
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