Investing.com -- Jefferies analysts initiated coverage of Instacart (NASDAQ:CART) with a Hold rating and a $45 price target on Wednesday, citing two major concerns: market share losses and uncertainty in advertising growth.
While the online grocery delivery platform benefits from a large total addressable market (TAM), Jefferies believes these risks limit upside potential.
The firm notes that Instacart operates in the $1.3 trillion U.S. grocery market, which is still in the early stages of shifting to digital.
They explain that currently, only 14% of grocery sales occur online, well below the 27% online penetration of other retail sectors.
Despite this potential, Jefferies estimates Instacart's gross transaction value (GTV) will grow at just 6.5% annually from 2024 to 2027—"roughly half the rate of broader online grocery."
This is said to be due to stiff competition from larger rivals like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), which have 24% and 34% of the market, respectively.
Jefferies notes that Instacart's market share has declined from 24% in 2021 to 19% today, and they "expect this trend to continue as competitors leverage greater product diversity for more efficient customer acquisition."
Another concern is Instacart's reliance on advertising to drive profitability. Although the company has built a $1 billion advertising business, Jefferies says its ad penetration has stagnated since the fourth quarter of 2023.
They state that advertising accounts for about 75% of Instacart's margin expansion and half of its EBITDA growth, meaning any slowdown in this segment could significantly impact earnings.
They view a "shortfall in advertising as the key downside risk for EBITDA."
Given these challenges, Jefferies believes a discounted valuation is warranted.
"Our DCF-derived $45 PT implies 11x '26 EV/EBITDA, which represents a ~15% discount to the peer-based growth-adjusted multiple," the analysts noted, citing Instacart's history of market share losses and uncertain advertising outlook.