Why Deutsche Bank is cautious on Instacart stock

Investing.com -- Deutsche Bank (ETR:DBKGn ) has initiated coverage on Instacart (Maplebear Inc.) with a Hold rating and a $37 price target on Tuesday, citing concerns over the grocery delivery platform's growth prospects and competitive positioning.

While Instacart (NASDAQ:CART ) has established itself as a profitable player in the digital grocery space, Deutsche Bank is cautious about its fundamentals over the next 12-24 months.

The analysts point to affordability challenges as a key factor impeding digital grocery share gains.

They note that the online grocery market, which currently holds a 12% penetration rate of the $1.3 trillion North American grocery market, has faced stalled momentum following pandemic-driven growth.

Factors like rising food inflation—averaging 15% year-over-year between 2022 and 2023—have amplified price sensitivity among consumers, according to Deutsche Bank.

Compounding this, groceries listed on third-party platforms like Instacart are said to often be priced significantly higher than in-store or grocers' own digital channels.

“Price remains a significant hurdle for Instacart,” the bank highlighted, with delivery prices sometimes “nearly 50% higher than Walmart (NYSE:WMT ) and 10% higher than Amazon (NASDAQ:AMZN ) Fresh,” despite efforts to reduce delivery fees and integrate loyalty programs.

These affordability initiatives have failed to spur significant user growth, which remains decelerated at around 10% year-over-year.

Deutsche Bank also expects increased competition from one-party (1P) operators like Walmart and Amazon, and marketplace rivals such as DoorDash (NASDAQ:DASH ) and Uber (NYSE:UBER ), all of whom have greater financial flexibility to address affordability challenges.

As a result, the analysts project a modest 7% gross transaction value (GTV) compound annual growth rate (CAGR) for Instacart between 2024 and 2028.

While Instacart boasts scale advantages, covering approximately 85% of the US grocery market and offering high reliability, Deutsche Bank believes its competitive edge in affordability is limited.

Consequently, Instacart is expected to grow slower than peers in an online grocery market expanding at a high single-digit CAGR.

Source: Investing.com