Instacart’s valuation isn’t the disappointment it might seem to be

In late 2020, the food delivery company DoorDash went public on the Nasdaq at $102 a share. It had $2.8 billion in annual revenue and no profits, but investors were not deterred: Demand for the company’s shares was so high that the stock rose 86% on the first day of trading, giving DoorDash a market cap of $72 billion.

Almost three years later, the food delivery company, Instacart, is going to hold its own IPO, going public at $28 to $30 a share. It has $2.5 billion in annual revenue, and is profitable. But it’s looking for, and should get, a valuation somewhere in the neighborhood of $10 billion. That’s a steep decline not just from DoorDash’s IPO, but from the $39 billion valuation that Instacart got when it did a private financing round in 2021. 

From one angle, you could see that sharp drop in the value of Instacart—a CNN headline called it a “free fall”—as a sign that the company’s future business prospects have really fallen off a cliff. But in fact, its underlying business is doing fine. Instacart (which specializes in grocery delivery) isn’t growing its sales anywhere near as quickly as it was back in the pandemic days of 2020-2021, but it’s added a new revenue stream in the form of advertising (which now accounts for almost 30% of the company’s revenue), and over the past 12 months, it generated almost $500 million in EBITDA.

So why is Instacart valuing itself at a small fraction of what DoorDash did? Because investors have become far more rational and more demanding; and in response, companies have been forced to adopt a far more reasonable view of what they’re actually worth.

That’s not always an easy thing for companies, or investors, to do. The temptation for a company to look back to its peak valuation and use it as a benchmark to judge itself against is hard to resist, just as investors who buy a stock at $100 a share and then watch its price drop keep expecting that it’ll eventually bounce back to where they bought it. Behavioral economists call this tendency “anchoring,” and it makes it difficult for us to adjust to new information and to recognize that conditions have fundamentally changed.

Using valuations from 2020-2021 as a benchmark, though, is a nonsensical thing to do. That’s especially true for companies like Instacart, DoorDash, Zoom, and Peloton, which were well-positioned to thrive during the pandemic. But it’s also true more generally, since money was very cheap, government stimulus checks put extra cash in retail investors’ hands, and social-media-fueled hysteria helped dramatically inflate the price of hot stocks.

And it wasn’t just ordinary investors. After all, it wasn’t retail investors who valued Instacart at $39 billion in 2021—it was the venture capitalists who invested $265 million into the company (a stake whose value has dropped by around 75%). VCs are supposed to be sharp investors. But even they, it turned out, got caught up in the frenzy of the moment.

The point is that lots of the valuations of 2020-2021 were imaginary, and had no real connection to companies’ underlying economic fundamentals. The extreme examples of this were, of course, meme stocks like GameStop, AMC, BlackBerry, and Bed Bath & Beyond. But there were what you might call micro-bubbles in a whole host of industries, and food delivery was obviously one of them. 

In that sense, the Instacart IPO is a welcome sign that everyone seems to be accepting reality. A $10 billion valuation for a profitable company with $2.5 billion in revenue is substantial, but not outrageous. (It’s also squarely in line with DoorDash’s current valuation.) In fact, by some measures, Instacart is valuing itself much more like a traditional services company than a tech stock.

That’s as it should be, and it should make people optimistic about the company’s future that instead of clinging to the past, it’s accepted that the market is where it is and moved on from there. Going forward, instead of talking about how much less companies are worth than they were three years ago, we should talk instead about how much they’re worth now.