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Fueled by another strong holiday season, grocery delivery company Instacart (CART) drove past Q4 Gross Transaction Volume (GTV) and earnings expectations, but another underwhelming outlook from the company has shares plunging lower. Like last quarter, CART forecasted GTV growth to slow down, projecting growth of 8-10% in Q1, while its Q1 adjusted EBITDA guidance of $220-$230 mln also missed the mark. An expected decline in average order value (AOV) partly due to CART's new $0 delivery fee on $10 minimum baskets, and a seasonal slowdown in higher-margin advertising revenue are set to weigh on profitability this quarter.

• CART's disappointing earnings report stands in contrast DoorDash's (DASH) strong Q4 earnings report from February 11 in which the food delivery company saw orders growth accelerate to 19% while Marketplace GOV rose 21%. Orders for CART increased by 11%, up from 10% in Q3, but transaction revenue growth fell to 10% from 12% last quarter, missing analysts' expectations. The slower transaction revenue growth resulted from investments into affordability initiatives designed to bolster customer engagement -- such as the $0 delivery fee noted above.
• Consumer spending trends and smaller basket sizes were already creating headwinds for AOV, which dipped by 1% in Q4 to $112, and now the new $0 fee on $10 minimum baskets will put more pressure on AOV. The trade-off is that CART expects order growth to accelerate, especially as it expands its partnerships with retailers and partners such as Uber (UBER).
• CART has managed expenses well and that continued in Q4. Specifically, adjusted total operating expenses of $426 mln represented 4.9% of GTV, down 40 bps on a yr/yr basis. This improvement was mainly due to lower R&D related to employee cash/equity elections.
• However, the solid cost management will be partly offset by sequential declines in higher margin advertising revenue in Q1. After growing by 11% to $246 mln in Q3, advertising revenue growth dipped a bit to 10% to $267 mln in Q4. The company continues to invest in its advertising business, introducing new features such as measurement tools for brands, launching new AI-powered landing pages, and offering scaled products like sponsored recipes.

The main takeaway is that CART's promotions, such as the new $0 delivery fee on $10 or greater baskets, and the associated disappointing Q1 adjusted EBITDA guidance, is creating some concern about its ability to keep generating strong profitable growth.