Description

Situation Overview:

Ibotta (“IBTA” or the “Company”) is a technology company that allows CPG brands to deliver digital promotions to millions of consumers through a single network called the Ibotta Performance Network (IPN).  The company has partnerships with over 2400 CPG companies and 300+ retailers including Walmart (WMT), Kroger (KR) and Dollar General (DG). Ibotta was a “hot” IPO in April 2024: the company grew revenues 52% in 2023, with 20%+ EBITDA margins, 70% incremental margins, low capital intensity, and expected 20% topline growth over the next few years.  Moreover, having Walmart as their top partner and shareholder did not hurt. That said, to be a successful IPO companies need to beat and raise out of the gate, which Ibotta failed to do. The company has derated significantly from its IPO valuation of 15.5x FY25 EBITDA to 9.7x today and the risk/reward from here seems extremely skewed to the upside.

My price target is $90, 16x FY25 Adj. EBITDA, for a 56% upside, on its way towards $120.

What does Ibotta do?

The model revolves around connecting consumers (called redeemers, 13.7m of them) with CPG companies (>2,400 of them) looking to offer cashback and rewards on their offerings through retailer partnerships or “publishers” (Walmart, Target, Family Dollar, Instacart as of 8/13). Most purchases redeemed on the IPN platform are groceries, but they have doubled the size of higher ASP general merchandise, such as electronics, pet, clothing and beauty over the past year.

As a fee-per-sale model, Ibotta only receives a fee from CPG partners when promotions are redeemed. Ibotta runs at no cost to retailers, but they receive a revenue share which varies, and is booked as a cost of revenue by Ibotta. The company operates in 3 segments: 3PP (~50%), D2C (~35%), and Advertising (~15%).

• 3PP Business
  • 49% of FY24 revenues, and I expect 46% growth in ‘25
  • The bulk of Ibotta’s revenue will stem from their 3PP growth. Consumers redeem offers through publisher touchpoints (ex: Walmart online grocer), Ibotta earns a fee from the CPG, and the redeemer (consumer) earns a cash-back 
  • Walmart (a strategic investor, owns 12.4% of the FDSO) is the anchor for the 3PP business, and is estimated to make up ~30% of total revenue, and nearly 80% of the 3PP redemption revenue
• D2C Business
  • 36% of FY24 revenues, and I expect 30% growth in ‘25
  • Direct offerings reaching ~1.8m consumers (as of Q2) through the company’s first party mobile app, website and browser extension to connect consumers to CPG offers.
• Advertising
  • 15% of FY24 revenues, and I expect a (4%) decline in ‘25
  • Traditional advertising business: display ads, video or email marketing campaigns that brands can purchase to promote products within the Ibotta D2C app
    • The Advertising segment is moderately correlated to D2C business given the marketing materials are distributed through the Ibotta D2C platforms (mobile app, website, browser extensions)

How does “redemption revenue” work?

When a consumer redeems an offer, Ibotta earns a fee usually fixed on a dollar amount per redemption based on retail price of an item. Example: If a General Mills $5.30 product is promoted with a $1.30 rebate in form of Walmart Cash, Walmart would invoice Ibotta $1.30, Ibotta invoices General Mills $2.10 netting the difference.

What has happened since the IPO:

A very hands-on approach from management during the IPO allocation process left 80% of institutional investors with zero stock, and a poor liquidity profile has followed. DE Shaw, who took down a significant portion of the offering, remaining one of the largest institutional shareholders. The ever-important first earnings as a public company failed to impress investors after charismatic 1^st time public company CEO Bryan Leach, who tells a bullish long-term story, failed to meet the “buyside bogey” on the core third party publisher segment, or “3PP”, which was 3% below estimates in total redeemer growth, but above total revenue growth, still short of investors expecting a beat-and-raise. While ’24 street estimate changes were neutral to positive, the stock price fell ~45% over the next 3 months on weakness in general advertising spend sentiment.

Q2 EPS management managed to beat both topline and EBITDA expectations by 3% alike driven by an outperformance of ~25% in its core 3PP business (~50% of revs), and announced a transformative partnership with Instacart, yet they lowered their Q3 revenue and EBITDA guidance by 5% and 9% due to the traditional D2C advertising business forecasted flat. Although the core 3PP business is accelerating, and the Instacart partnership may prove to be as impactful as the current Walmart growth driver, street estimates have been brought down 2% and 3% for ’25 revenue and EBITDA, and the stock decline of ~60% since its Q1 EPS is an overblown market dislocation.

Looking even further back to pre-IPO investor education, the street’s expectations for FY25 are virtually unchanged versus now, despite missing earnings. The decline has been driven solely off multiple compression and a decline in confidence of the management team, despite warnings that growth could be lumpy. The long-term growth story has improved since the April launch, given the Instacart announcement which could lead to followers DASH and UBER, yet sentiment sits at rock bottom.

The company also recently announced a $100m share repurchase program (see here) on August 22^nd that can be made through either the open market or privately negotiated repurchases, with no expiration date. A strong signal before their 1^st lockup expiry (Sept 3^rd 20% of shares, ~5.5m) that they too, believe their stock is extremely undervalued, and the stock proceeded to rise 16% the following day.

I believe if you fast forward 6 months from now, CPG budgets will have stabilized and accelerated, the ’25 budgeting season will be behind us and likely in-line with / over exceeding expectations, Instacart will be ramping, and the companies durability and growth potential will be better understood and reflected in the stock price. This will lead to shares trading to at least $90, on their way to $120+ based on 16x EBITDA.  

Valuation

Taking a step back, 9x EBITDA is quite frankly too cheap for a business model of this quality. The core business is performing well, the company has over 20% of its market cap in cash, is close to a 10% FCF yield, and there exists a long runway of growth ahead. The Walmart (WMT) partnership is still in early innings and the recent announcement of a partnership with Instacart (CART) is underappreciated. There is no “perfect comp” for the company, but referencing AdTech players (TTD, KVYO, APP, DV) or two-sided marketplaces (UBER, DASH), this is blatantly too wide of a discount. Ibotta is at its trough multiple, prime to re-rate as investor confidence stabilizes, and estimates come to realize the potential topline growth impact Instacart represents. The risk/reward here is heavily skewed towards the upside.

PT: $90, 16x FY25 Adj. EBITDA, 56% upside     

Looking at a regression vs. our selected peers, whilst missing a strong >80% R-squared, it still highlights the stark gap in valuation.

Investment Highlights

• Large runway for growth
  • $1.2t spent on groceries and CPG spend ~$200b on marketing annually
  • Early innings for adoption, especially with flagship partner (and shareholder) $264b GTV Walmart, still ~2% penetrated
  • New wins include $30b GTV Instacart, with DASH and UBER likely next targets
  • Non-Grocery opportunities untapped, Home Depot, PetSmart, etc.
• Strong financial model
  • Management targeting 20% long term macro-insulated growth
  • Great unit economics receiving ~80c a redemption, with high 80s gross margin
  • Low capital intensity translating to robust cash generation
  • Long term high-40’s to low-50’s EBITDA margins are possible
• Unique platform, the first to build a platform for performance promotions
  • Differentiated through its access to 1^st party data
    • Ability to pinpoint consumer based on who you are and what you buy through the IPN, enabling clients to optimize campaign objectives, resulting in 7x ROAS
  • A solution to the physical attribution issue in digital marketing
• Strong network with legitimate flywheel impact strengthens their moat
  • Publishers join the network to retain market share, benefit from the revenue share agreements, larger basket sizes, and attract incremental CPG advertising budgets
  • As more retailers and redeemers are onboarded into the network, CPG brands increase their allocation of promotional budgets with Ibotta to meet a growing consumer base, drive verified and observable incremental sales, and protect their sales from private label competition
    • Ibotta’s proving their marketed 7x ROAS vs. traditional paper coupons, performance, and traditional marketing has seen significant traction
  • Spent 12 years in the trenches investing time and capital to build partnerships resulting in over 2k brand relationships with extremely high retentions

Point #1: Instacart partnership is not being appreciated

Along with missing their Q3 guidance, Ibotta announced that Instacart selected them to run their digital advertising, replacing their in-house process, a signal to others of Ibotta’s legitimacy. The partnership also gives IBTA a foot in the door for large retailers such as Costco and Sam’s Club along with a clear incentive for DASH and UBER to sign on.

Instacart will significantly help the company deliver on their growth targets set at the IPO, and I believe the street is incorrectly modeling this opportunity. D2C numbers have been brought down 14%, or a ~30m impact, advertising revenue down ~30%, total revenue and EBITDA down 2% and 3%, while 3PP increased by 16% (+~80m impact).

Sell side estimates are currently assuming no change in % of non-Walmart 3PP redemption revenue, meaning only $16m of growth in ’25 from any other sources, which differs our takeaways from management. Street analysts have made it explicit that this is conservative, thus my assumptions are below. If management has sized the CART opportunity correctly, and they have become more efficient in the ramp (given they’ve done this before with WMT) this could mean a meaningful outperformance (+17%) on topline growth.

Assumptions:

1. Walmart accounts for ~80% of Ibotta’s 3PP redemption revenue
2. ~90% is of Walmart’s 3PP Redemption revenue is E-Commerce
3. Given management commentary on Q2 EPS, Instacart’s grocery e-commerce business is 2/3 the size of Walmart
4. Instacart/Ibotta operates at two-thirds utilization for FY25, given management is aiming for a Q4 ’24 rollout, this may prove to be conservative
5. ~$20m and $30m of 3PP redemption revenue is baked into sell-side estimates (’25 / ’26)
6. Instacart ramp is complete by FY26
7. Management can convert a similar 15% free cash from CART, similar to WMT

Assuming this impact, Ibotta is trading at 8.8x ’25 EBITDA, thus the upside to 16x is $100, or 75% from current levels.

Keep in mind, following the Q2 beat and Q3 guide-down, street estimates for FY25 revenue and EBITDA have been lowered -2% and -3% respectively. Short-term disruption impacting long-term financials.

Point #2: Walmart opportunity is larger than being priced in

Walmart remains the largest source of upside long-term, and is still in very early innings, only ~9 months into the 100% rollout. Ibotta has only reached ~2.1% of e-commerce users, and only 2.6% of Walmart’s online grocery revenues have an Ibotta promotion attached, which will gradually grow as Ibotta onboards CPG brands to stay competitive. This is currently 100% organic growth. Walmart, a ~12% shareholder of Ibotta, handling >$264b in GTV annually, has not done much to promote Ibotta, whether in-store or online, hence it is a “white label” program. Notably, on Ibotta’s most recent earnings call, management highlighted that “there are a number of initiatives that we are excited to look out to that we think will further catalyze growth at Walmart”. Given recent calls with the company, I believe they are in the pilot stage of electronic shelf tags advertising rollbacks and Ibotta cash back opportunities, implemented in 500 stores, with ’26 targeting a nationwide rollout. If Walmart were to explicitly market digital promotions at scale, inorganic growth would provide massive upside to the ~80% of Ibotta’s 3PP revenue that Walmart provides.

To contextualize the size of this opportunity, the street estimates that for every 50bps that Ibotta promotions expands as a % of Walmart online grocery revenues (only 2.1% now, and 0.3% of total grocery), Ibotta would benefit by 7.5% topline and 13.8% in EBITDA. Capitalizing on in-store redeemers is an afterburner to the growth story here, and the company is well aware and focusing here.

Point #3: New partnerships incoming

CEO Bryan Leach is not directly involved in sales unless they are serious. According to my recent conversations with the company, he is currently very busy with several potential deals. New partnerships translate directly to a greater reach of accessible redeemers and core redemption revenue. The CART partnership is an immediate afterburner to DASH, UBER, and other retailers not currently on the IPN, given their internal delivery mechanisms could now be disadvantaged.

Leach, who attended Cannes in June (’24) also referenced a longtail Amazon partnership given the synergies in their e-commerce business, noting that “if Amazon is not on the IPN in 3 years, it is the management team’s fault”. While it is overly optimistic to include this in my forward projections, this would be a massive opportunity, and would lever Ibotta to 3 of the most important consumer reaching companies, WMT, CART and AMZN in the United States, with 64% market share between them in grocery ecommerce.

Point #4: Market leader in a potential winner-take-all environment

Over 10 years of “hand-to-hand combat” in winning deals as a private company, the company has established a deep moat of partnerships with a massive network of 2,400+ CPG brands, and 300+ retailers (Walmart, Target, Family Dollar, now Instacart). This is a $200b CPG advertising opportunity. The IPN’s advertising scale, efficiency and transparency shown through its 7x ROAS has spurred the median CPG budget on Ibotta for >$50k accounts to grow 50% y/y, despite a weak advertising budget environment. Some of their largest y/y increases have stemmed from higher ASP general merchandise showing real traction.

There is a growing desire within CPG brands to use digital promotions to recapture price sensitive customers that have drifted towards private label brands. Ibotta’s competitors such as Rakuten, Quotient, and Inmar (all private companies) lack the scale given Ibotta claims 4x the promotional content load than the next largest competitor and have a less-attractive fee per clip/click model.

The fee-per-redemption model, meaning that Ibotta is only paid when consumers redeem the Ibotta offering, is enticing, but as advertising budgets are typically rigid (refreshed annually), Ibotta does not require budget increases in order to grow… they just need a larger allocation, which we are confident will ensue given commentary around campaigns being launched and completed ahead of target, highlighting best-in-class time to value. The Ibotta offering is simply becoming a more prevalent strategy in a CMOs arsenal.

Concerns

Lack of Confidence in Management: Fresh after an IPO, the last thing a company should do is miss expectations. Ibotta did it twice. Management’s credibility is de minimis at this point, but the IR is an experienced investor, formerly from the buy-side, and is well aware of how important it is going to be to report consistently and forecast conservatively.

Illiquidity: Trading only ~260k shares a day is a barrier to entry for some institutional investors. This is not an under-covered name given it was a hot IPO, but it is not an easy story to understand. I believe value investors that were interested during the IPO process are now re-visiting the company given its inherent value.

CPG Advertising weakness: Yes, advertising budgets are getting squeezed industry wide which we saw evident in their Ad segment last quarter. However, the industry has shifted towards high-attribution, clear ROAS solutions that have clear observability, such as Ibotta’s fee-per-redemption model.

There have also been green shoots coming from coupon spending commentary such as Jeff Harmening, CEO of General Mills commenting on their plans to increase coupon spend in 1H FY25 by 20% [per 4Q FY24 GIS earnings call], citing Ibotta.

Catalyst

• September 3^rd: ~5.5m shares will be eligible to be sold to market, ~20% of the locked-up shares. I do not expect much supply given where the stock is trading and would be surprised if there were to be large blocks.
  • The company has indicated they will be using the aforementioned $100m share repurchase authorization post-unlock, so we expect them to lend support to shares. I'd note the removal of lockup overhang for CART was a major catalyst for the stock, supported by a buyback (moved from mid-$20s to mid-$30s)
• Timing Unknown: The larger lockup release date is not currently set, but expect to see 22.5m shares unlocked, hopefully a tailwind to liquidity.Potential Analyst
• Upgrades: Goldman Sachs, the only neutral-rated sell side shop despite being lead-left on the IPO
• Potential new publisher announcements: DASH, UBER, COST, etc
• Improving advertising budget environment