Instacart, the company officially known as Maplebear, made a strong debut on the stock market recently, with shares climbing 12% on the first day. However, its decision to release less than 8% of its total shares for public trading, a strategy known as "low float," could pose future challenges. This approach often leads to an imbalance between supply and demand, causing a sharp increase in share prices upon opening.
The CEO of Instacart, Fidji Simon, defended the company's strategy in a conversation with CNBC. Simon stated that the primary objective of the initial public offering (IPO) was not to raise capital but to provide liquidity for employees who have worked hard to enhance the company's value.
Instacart is not the only company to adopt this strategy. Chip manufacturer Arm Holdings (NASDAQ:ARM) and Vietnamese electric car start-up VinFast Auto (NASDAQ:VFS) also opted for low floats when they went public - with 9.3% and 0.3% respectively. On their opening day, Arm's shares increased by 25% above their IPO price, while VinFast's shares soared by an impressive 255%.
According to Jay Ritter, a finance professor at the University of Florida who specializes in initial public offerings, this trend towards lower floats is becoming increasingly prevalent. His research shows that in both 2021 and 2022, the average float was around 18% and 19%, marking the lowest levels seen in over four decades.
However, this approach has potential downsides. While low floats can result in impressive returns when share prices rise, they can also exacerbate losses if the share price drops. For instance, Arm's shares fell by 4.5% on their second and third days of trading. Similarly, VinFast's shares are now valued at approximately half of their closing price following the completion of their SPAC deal.
While the future performance of Instacart's shares on the stock market is not preordained by its low float, it is a significant factor for potential investors to consider. The company's financial health and operational success will ultimately determine its long-term share price.
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