Instacart (CART, Financial) exceeded Q4 Gross Transaction Volume (GTV) and earnings expectations, driven by a robust holiday season. However, a disappointing outlook for Q1 has caused its shares to decline. The company projects an 8-10% growth in GTV and expects Q1 adjusted EBITDA of $220-$230 million, which fell short of expectations. A decrease in average order value (AOV), due in part to a new $0 delivery fee on $10 minimum baskets, along with a seasonal slowdown in advertising revenue, is expected to impact profitability.

In contrast, DoorDash (DASH, Financial) reported strong Q4 earnings with a 19% increase in orders and a 21% rise in Marketplace GOV. Instacart saw an 11% rise in orders, up from 10% in Q3, but its transaction revenue growth slowed to 10%, missing forecasts. This slowdown is attributed to investments in affordability initiatives, including the $0 delivery fee.

Consumer spending trends and smaller basket sizes have already affected AOV, which fell by 1% in Q4 to $112. The $0 fee on $10 minimum baskets is likely to further pressure AOV. However, Instacart expects order growth to accelerate as it expands partnerships with retailers and partners like Uber (UBER, Financial).

Instacart has managed expenses effectively, with Q4 adjusted total operating expenses at $426 million, accounting for 4.9% of GTV, a 40 basis point improvement year-over-year. This was mainly due to reduced R&D costs related to employee cash/equity elections.

Despite effective cost management, a decline in higher-margin advertising revenue is anticipated in Q1. Advertising revenue grew by 11% to $246 million in Q3 but slowed to 10% growth, reaching $267 million in Q4. Instacart continues to invest in its advertising business, introducing features like brand measurement tools, AI-powered landing pages, and products such as sponsored recipes.

The key takeaway is that Instacart's promotions, including the $0 delivery fee on $10 or greater baskets, along with the disappointing Q1 adjusted EBITDA guidance, have raised concerns about its ability to sustain strong profitable growth.