This Online Advertising Pioneer Should Be On Your Radar

May 18, 2018

This Online Advertising Pioneer Should Be On Your Radar

As you know, I’m a value investor. This doesn’t mean I shun growth, and I always look for the perfect combination where value is coming alongside growth.

Today, I’ll share my preliminary research on Criteo (NASDAQ: CRTO) which is doing business in the very interesting sector of online advertising. Hopefully, this will give you an idea for a stock to watch.



Company Overview

Criteo is a French digital performance marketing company that is behind many of the ads you see when you browse the internet. As online ads are becoming the key to target customers, it’s wise to take a look at one of the leading companies and industry pioneers.

Figure 1: Criteo’s ecosystem. Source: CRTO.

The company analyzes lots of data to try and match the best ad to the customer in compliance with all the rules out there. The below figure shows how this works in practice.

Figure 2: The practical side of online commerce marketing. Source: CRTO.

As we all know, the digital advertising environment is the wild west and this has made CRTO an extremely volatile stock.

Figure 3: CRTO’s stock price since IPO. Source: CNN Money.

The company went public at $35, spiked to above $50 in early 2014 only to drop below $30, spiked again to above $50, dropped again, spiked again, and lately it has been down again. As the online advertisement market is volatile, so is CRTO’s stock. Products like ad-blockers and Apple’s Intelligent Tracking Prevention System, which blocks some cookies, have scared the market and the latest scare has come from a fear of less available data for CRTO, which will lower the value of its products to their customers.

Let’s look at the trends to see what’s going on.



Trends & Future Growth

The online ad business has grown very quickly, but is still expected to grow at double-digit rates over the next 5 years.

Figure 4: Expectations for online ad growth. Source: Statista.

As CRTO is a pioneer in the industry, it may continue to grow, not at the staggering rates it has in the past, but at market rates which makes it an interesting stock to watch. The management guides revenue growth between 3% and 8% in constant currency, which isn’t something CRTO shareholders like as they have been used to much bigger growth numbers.

Figure 5: CRTO’s 1-year revenue growth chart. Source: Morningstar, author’s edit.

The revenue slowdown alongside the newly implemented European General Data Protection Regulation (GDPR) is putting pressure on the sector. Further, the company’s customer acquisition growth has stalled a bit but the new strategy that is being implemented hopes to improve that over time.

Figure 6: Customer acquisition growth slowed down a bit. Source: CRTO.

However, what’s positive is the relatively high customer retention rate of above 90%.

Now, the main question is, will Criteo be able to continue to grow despite all the challenges? The management is doing two things to further grow, but those take time.

They are developing a self-service platform for smaller clients and focusing on larger mid-market clients, so 2018 will be a transition year for the company. Further, they are developing an Amazon-like granular communication with online consumers that will give what Amazon offers to CRTO’s clients. So, CRTO is a company in an exciting trend with lots of upside potential, but also uncertainty which is why the stock price is down.

Let’s look at the fundamentals to assess the risk and reward.



Fundamental Analysis

The cash pile is approaching $500 million and on a direct question in the last conference call, the CEO said they are exploring new markets and M&A where he sees the cash as helpful. However, just the cash per share is $7.11 with book value being $14.24 per share. By removing the cash from the stock price of $27, we get a price of $20 which isn’t bad for EPS of $1.45 and the potential for growth.

The return on invested capital has constantly been above 10% in the last 4 years, and the operating cash flow is $286 million giving a price to operating cash flow of 6.25.

Conclusion

We have to put this into the short term perspective Wall Street has.

If the new GDPR regulation in Europe really impacts CRTO in addition to companies like Facebook and Google providing ads only in their walled gardens, and CRTO doesn’t manage to grow and even sees declining revenues, the stock could be hit even harder. However, if the company manages to grow despite the circumstances and the transition strategy works, we might see it at $50 and above.

So, there is risk, but there is also potential reward which makes CRTO a company to follow especially as Q2 is the slowest quarter in the advertising business and gives us some more time to learn about the company.