A large number of hedge funds hold stakes in Instacart, the online grocery company whose business boomed during the global pandemic and went public in mid-September amid much fanfare.
The company’s prospectus, filed by parent Maplebear, names only two hedge funds among its shareholders: D1 Capital Partners and Valiant Capital Partners. Before the offering, D1 was the second-largest shareholder, holding more than 36.8 million shares, or 14 percent of the total.
Valiant and D1 were also among a small group of investors that Instacart said had planned to purchase a combined $400 million of stock at the IPO price. Sure enough, according to quarterly 13F documents identifying public stock holdings that were made public last week, D1 and Valiant were the second- and fifth-largest shareholders of Instacart, respectively, as of September.
The 13F documents also showed that a shopping cart full of other hedge funds held stakes in the company as of the end of the third quarter. They include Coatue Management, the third-largest shareholder, and Tiger Global Management, a much smaller investor that had invested in the company several years ago when it was private.
Other prominent hedge funds reporting stakes included Viking Global Investors, Tiger Management, Marshall Wace, Holocene Advisors, and Sculptor Capital. It is not known whether they bought the shares at the IPO or after the stock began trading.
Instacart went public on September 18, at $30 per share, and surged to nearly $43 at one point. But the stock is currently trading at about $25 per share.
Pre-IPO investors are locked up until the company reports first-quarter results next year, according to Valiant’s third-quarter client letter, which was obtained by Institutional Investor. In the letter, Valiant, which has a separate portfolio for privates —it calls them side-pocket investments — was bullish on the stock. “We find the stock extremely compelling at current valuations and purchased a position for the hedge fund despite the current large side-pocket position,” Valiant founder Chris Hansen noted.
Hansen called Instacart the market-leading grocery technology company in North America, offering shopping, delivery, and pickup services for more than 80,000 mostly grocery stores. “The company also offers its retailer partners a suite of enterprise-grade technology products and services to power their e-commerce experiences, fulfill orders, digitize brick-and-mortar stores, provide advertising services, and glean insights,” he added.
Hansen explained that the IPO was very unusual, partly because it was a difficult market in which to sell shares. Perhaps more significantly, the entire offering consisted of secondary shares. Hansen stressed that the company did not have the desire or need to sell primary shares and raise capital at the IPO price as it is profitable and holds more than $2 billion of net cash on its balance sheet.
He said, however, that the willingness of existing shareholders to sell at the IPO price was “limited.” So only about 7 percent of total company shares were sold in the IPO, resulting in “an unusually small public float until the lockup expires.” The downside, of course, is that when that happens, shelves full of shares could wind up flooding the market, “creating a scary overhang for investors thinking about owning” the shares before that time.
“An additional and maybe less obvious implication is that the limited public float is too small for many institutional investors to build a meaningful position, which has also curtailed new investor interest,” Hansen noted. “We believe that these factors have combined to make Instacart somewhat of an orphan stock prior to the lockup expiry, with many (especially institutional) investors preferring to stay on the sidelines until the float increases.”
He acknowledged that investors are concerned about the slowdown in the growth of Instacart’s critical measure — what it calls gross transaction volume — as well as revenue since the end of the pandemic. “Our sense is that current investor sentiment sits somewhere between indifferent and highly negative,” Hansen explained. As a result, Valiant believes that Instacart is trading at a valuation of roughly 10 times Valiant’s estimated free cash flow for 2023.
“We are more confident than ever about Instacart’s competitive position,” Hansen said. “Despite large investments by competitors during and after Covid, [Instacart] has maintained its dominant market share of online grocery orders over $100 since 2019.”
