01:59 PM EDT, 09/24/2024 (MT Newswires) -- Instacart's (CART) bid to diversify toward smaller advertisers is taking time to drive an improvement in advertisement growth as certain large advertisers pull back on spending, Morgan Stanley said in a note e-mailed Tuesday.

Last month, the online grocery delivery company said it expected third-quarter gross transaction value, or GTV, between $8.1 billion and $8.25 billion, representing year-over-year growth of 8% to 10%. Instacart pegged adjusted earnings before interest, taxes, depreciation, and amortization at $205 million to $215 million for the quarter.

Second-quarter advertising and other revenue jumped 11% year over year amid growth in emerging brands, Chief Financial Officer Emily Reuter said on an earnings conference call in August, according to a Capital IQ transcript. "This growth more than offset the pullback in spend we continue to see from certain large brand partners experiencing challenges in their business."

Morgan Stanley said it is now "more cautious" on Instacart's ad ramp. Broader comments indicate a slower ramp to achieving the company's long-term ad revenue outlook of 4% to 5% of GTV, the brokerage said in a note to clients.

"Like other ad platforms, advertiser density and count matter to driving durable growth...and (Instacart's) ad business is still somewhat subscale and less performance-based (in some cases)," Morgan Stanley wrote. The brokerage said it is seeking further proof of Instacart's GTV topline durability as companies like Amazon.com ( AMZN ) and Walmart ( WMT ) continue to invest and "press into the critical" online grocery industry.

Morgan Stanley reduced its 2024 and 2025 EBITDA outlook for Instacart by 1% and 8%, respectively. The brokerage lowered its price target on the company's stock to $41 from $45.

Instacart shares were down 1.8% in Tuesday afternoon trade, but are up 68% so far this year.

"We remain (equal-weight) as we wait to see evidence that investments into diversifying the advertiser base are translating into revenue (and) EBITDA growth," Morgan Stanley wrote. The brokerage said it continues to prefer to invest in the online grocery industry through Amazon ( AMZN ), Uber Technologies ( UBER ) and DoorDash ( DASH ) over Instacart for now.

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