The tech IPO (initial public offering) drought might be over with September set to see a couple of hotly anticipated new listings on Wall Street. Regular Shares readers will know that UK-based chip designs firm ARM (read about it here) is set to make its market debut on Nasdaq this week (13 Sep), and it looks likely to be joined by Instacart, another highly anticipated tech float.

Instacart, a grocery delivery app, announced overnight that it too expects to list on Nasdaq this month, albeit setting a much-reduced target valuation range between $8.6 billion and $9.3 billion. That’s a far cry from the $39 billion valuation that venture capital investors placed on the San Francisco-based company in 2021, when start-up funding reached all-time highs.

It’s also lower than the $13 billion internal valuation reportedly set in 2022.

RESETTING VALUATION BAR

Analysts believe the valuation target will send investors a clear message that they need to reset expectations for upcoming tech IPOs. According to Crunchbase, there are more than 1,400 unicorns (privately-owned companies valued at more than $1 billion) waiting in the wings and assessing IPOs, worth more than $5 trillion.

These include $10 billion marketing tech start-up Klaviyo, which is also expected to go public this month, and Turo, a peer-to-peer car rental service.

While a significant drop in Instacart’s pre-IPO valuation may be construed as a bad sign to potential investors, it could also be tactical, believe analysts. They argue that by establishing lower IPO valuations, it allows new listings to generate wind in their sails with regular upgrades to expectations.

If right, this could be a good sign for retail investors, with the potential for share prices to rally in the opening weeks and months.

PROFITS ON AN UP CURVE

In Instacart's case, the company is already profitable, with its second quarter 2023 showing $114 million net income on $716 million revenue. That was slightly down on Q1, when it generated $128 million net income on $759 million revenues, although this may be impacted by seasonality, weather and other factors. In 2022, Instacart turned a $242 million profit after losing $74 million the year prior.

The company is being backed by PepsiCo (PEP:NASDAQ), and is working with 1,400 retailers and 80,000 stores across the US. To add to all of that, its ad business is proving to be lucrative, too, with advertising revenue up 24% during the second quarter.

 

---