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With shares surging by more than 40% since early September, Instacart (CART) faced a high bar to hurdle last night when the grocery delivery platform provider reported Q3 results. Following in the footsteps of fellow food delivery company DoorDash (DASH), which posted better-than-expected Q3 results on October 30, CART issued strong quarterly results that exceeded expectations across the board. However, the impressive Q3 performance is being clouded over by a disappointing Q4 outlook that includes a projected slowdown in Gross Transaction Value (GTV) growth and an adjusted EBITDA forecast that came up a bit short of analysts' expectations.

• Similar to DASH and Uber (UBER) Eats, CART became a mainstay during the pandemic and many of the users that flocked to its platform at that time are now using it habitually. Still, the grocery market remains vastly underpenetrated online, and CART is steadily expanding its reach and adding capabilities to help mitigate delivery fees. For instance, it provides EBT SNAP, loyalty, and flyers that are integrated with its top twenty retailers, and it also announced a new partnership with digital coupon/promotion company Ibotta (IBTA) in which CART customers will receive access to IBTA coupons.
• These factors helped drive GTV higher by 11% in Q3 to $8.3 bln, exceeding the high end of CART's $8.10-$8.25 bln guidance range. Most of the growth was due to a 10% increase in orders to 72.9 mln, while Average Order Value (AOV) edged higher by just 1% as consumers continue to keep a tight lid on costs.
• CART is keeping a tight lid on its own costs, illustrated by adjusted total operating expenses representing 5.1% of GTV compared to 5.6% in the year-earlier period. Reduced headcount and a decrease in R&D expenses related to employee cash/equity elections pushed expenses as a percentage of GTV lower.
• A key component of CART's growth strategy is to expand its higher-margin advertising business. In Q3, advertising revenue grew by 11% to $246 mln, matching last quarter's growth, as CART continues to make progress on diversifying its ad customers and the different sites where its ad appears. During the earnings call, CART noted that it's seeing strength among emerging brands, helping to offset some ongoing softness from large consumer packaged goods companies.
• This combination of healthy ad revenue growth and cost containment efforts led to a 39% yr/yr increase in adjusted EBITDA to $227 mln, beating its guidance of $205-$215 mln. However, CART's Q4 adjusted EBITDA guidance of $230-$240 mln came in below expectations.
• While the company's Q4 GTV guidance of $8.50-$8.65 bln was slightly ahead of estimates at the midpoint, it does suggest a slowdown in growth to 8-10%. CART attributes the deceleration to a difficult yr/yr comparison against last year's strong holiday season, and to a recent web outage at one of its retail partners, Royal Ahold Delhaize, which owns grocery chain brands such as Food Lion, Stop & Shop, and Giant.

The main takeaway is that CART delivered another strong earnings report, reflecting the resiliency and stickiness of its business, but with shares soaring to all-time highs this past week, the company needed to knock it out of the park to avoid a sell-the-news reaction. Although CART's Q3 results may have met that lofty standard, its Q4 guidance did not, resulting in a steep profit-taking pullback.