Criteo Is An Underappreciated AdTech Power Player

Headquartered in France, Criteo (CRTO) is a leading global player in the eCommerce marketing sector. Sit in the center of eCommerce, it partners with advertisement inventory suppliers to provide marketers (retailers/brands) targeted omnichannel advertisement services to its customers.

Investment Thesis

Criteo is currently priced as a failed advertisement retargeting company, while it is in the midst of a transformation to become a full-stack AdTech power player with a vast client base and global reach. Its upside potential, if and when discovered by the market, could offer a 100-200% return to catch up with its peers despite a recent 50% surge.

Its downside risk, under a quite pessimistic model (discussed in a later chapter), is about 20%.

This is a classic asymmetric bet opportunity that offers great upside potential and limited downside risk.

Peer Comparison

I usually don’t start with peer valuation comparison, because cheaper than its peers alone is rarely a good reason to buy. However, in this case, the number is simply jaw-dropping not to present it first.

The table below compares key metrics from the last 12 months among some prominent AdTech players. The number is to Criteo’s slight advantage as it includes the latest 4Q20 results, while 2 of its peers’ latest quarterly report is not out yet.

Note 1: Criteo’s reported revenue in sec filings includes TAC (Traffic Acquisition Cost), while The Trade Desk (TTD) exclude that, I deducted the TAC portion from Criteo to offer a more meaningful comparison.

Note 2: Both Criteo and TTD are more comparable as DSP platforms, while MGNI is an SSP (Sell Side Platform).

Revenue-wise, Criteo is about 1.5x the size of TTD, and 5x larger than Magnite. However, its Market Cap is less than 1/3 of Magnite, and only 5% of TTD.

While its LTM rev growth is a concerning -8% YoY compared to its competitors 20%+, it remains a profitable business since 2013.

Its EV/Sales and EV/EBITDA numbers are jaw-dropping 80-100x cheaper compared to TTD.

I am not here to judge whether Magnite or TTD are overvalued or not, which deserves a separate analysis. The comparison above points to a severely mispriced opportunity if Criteo is a fundamentally sound business.

Business

Criteo is an AdTech company that sits in between the advertisers (brands such as Puma), publishers (ad suppliers such as ViacomCBS), and consumers. It partners with ad suppliers to deliver targeted advertisements to end consumers.

Criteo runs a highly distributed business – with 20k+ clients globally, Criteo’s largest client only represented 2.8% of its total revenue, and its top 10 clients only represented 11.4% total revenue in 2019. It operates in over 100 countries, with 28 offices, 93% of revenue is outside of its home country France.



Gartner Magic Quadrant for AdTech 2020 ranks Criteo in the Challengers category (together with Amazon), while Google Ads (GOOG), The Trade Desk, and Adobe are among the leaders in the space.

Source: Gartner Magic Quadrant for AdTech 2020
Recent Challenges and Response
Criteo is often perceived as an ads retargeting company that have difficulty thriving as a viable business under the current environment. However, Criteo has demonstrated through both its revenue sources and its product roadmap that it is on a path to become a full-stack eCommerce advertising solution provider. Here are some discussions during the recent earnings call:
Q3Y20 Earning from CEO Megan Clarken:
From our past as the global leader in retargeting, we’ve begun expanding our portfolio to bring new fast-growth areas, while evolving and adding many capabilities to our core offering, fitting nicely with our strategy. Our new solutions already represent close to 20% of our business, and so far growing 53% in 2020.
Q4Y20 Earning from CEO Megan Clarken:
Let me give you a few examples that bring this to life. During the Q4 holiday season, … a large New York based retailer came to us with a double challenge for their marketing and monetization. With their marketing, they needed to address new shopping behavior and move potential shoppers down the funnel to close the conversion loop. We designed a full funnel audience strategy for them to drive consideration from non-buyers and engage previous buyers, leveraging online and offline data to drive more conversions to their e-commerce site.
For this, we drew on our growing suite of Commerce Media capabilities, our commerce data, product recommendation, predictive bidding, creative suite and brand safety capabilities. … Overall, our engagement with them across marketing and monetization helped this client achieve tremendous results in Q4 and contributed $9 million in revenue ex-TAC to our results, up 40% year-over-year.
Now as the old Criteo, a retargeting only company, we would not have been able to offer what I just described. This is our new direction.
Here is a chart from its latest investor presentation on its transformation.
An insightful example was discussed in detail in a Q420 earnings call that less than 40% of customer ad money goes to its traditional retargeting efforts.
Vital dependency on third-party cookies: Historically Criteo and most AdTech companies use third-party cookies to keep track of users’ data and behavior to provide targeted advertisements.
in Jan2020, Google announced its plan in 2 years to end its support for third-party cookies.
Apple’s IDFA initiative (ID for advertisers will be blocked by default) is rolled out as iPhone users upgrade to its IOS 14 release.
These are power moves from dominating infrastructure players (Google and Apple) and clearly is a significant threat to most ad tech companies who rely on that information.
The industry is responding with the Unified ID 2.0 initiative led by The Trade Desk. It is intended to unite all leading partners and collaborates across the ecosystem to build an Open Internet ID framework. In Oct 2020, Criteo joined the initiative with TTD, as a result, two of the largest demand side advertising platforms are working together to help drive the future of consumer identity and privacy on the open internet.
In summary, Criteo is taking concrete measures and forming a solid plan to respond to what I consider major challenges to the company and its industry. It is in the midst of transforming from a singular ads-targeting company to be a full-stack eCommerce advertising, joining forces with its top peers such as TTD to prepare for a cookieless 1st-party data-driven ads platform player.
Other Reasons for Success
Direct access to consumer data: The key to providing targeted and high-value advertisements to its clients is its access to user behavior, this is where Google and Facebook had built-in advantages within its vast walled garden to understand/analyze user behavior. I would argue Criteo has one of the best available resources right after these giants.
Source: Criteo Q4 2020 Investor Presentation
Some data below underscores its vast scale – Criteo ingests over $2.5 billion of daily transactions from over 21,000 commerce clients, across 4 billion product SKUs and 3,500 product categories. It has direct access to the data via integration with retailer clients (e.g. Walmart).
Leadership Change: Megan Clarken joined Criteo as its CEO in Nov 2019. Not a typical career CEO by any measure, Ms. Clarken, a native of New Zealand, was a professional athlete in track and field, and still holds 4 records in the long jump and 100M in New Zealand. Before joining Criteo, Megan was CCO for Nielsen Global Media. If you want to get a sense of what a resilient leader she is, I recommend this interview. Her team members speak highly of her less than 2 years into the job, with a very respectable 92% approval rate on Glassdoor.
Clear Product Roadmap: Transforming from an ad retargeting company to a full-stack solution provider requires a solid product roadmap, which I think Criteo articulates/executes well so far. The strategy starts with high-quality first-party data from both its retailers and UID2.0 partnership with TTD, and focuses on building out an AI-enabled analytics platform to provide valuable consumer insights so that advertisers can target their potential clients in omnichannel, including desktop, mobile and onsite. Criteo also partners with ad inventory suppliers through a direct bidder program to offer an end-to-end solution.
Acquisition & Merger Possibilities: It seems that wall street analysts agree with our assessment on Criteo’s undervaluation compared to its peers, here is an exchange during a recent earnings call with regard to how to fend-off potential A&M:
Matthew Thornton
And then just final question, maybe for Megan. When you think about the two sides of the business, the Retail Media business, if you look at some of the valuations out there around ad tech that have certainly re-rated recently and then kind of the core retargeting business, when you think about valuation and where you sit right now, I guess, how do you think about Criteo as a potential M&A target, how do you fend off M&A?
Megan Clarken
Yes, Matt, let me take the last one in terms of how we feel about M&A. We’re — as you can hopefully tell, just laser-focused on our strategy and executing against our strategy. And certainly, my job has been to come in and to run a transformation across the business to return to sustainable growth. And that’s what I’m focused on. … we run an active pipeline to look for those opportunities every day. And we’re very thoughtful in our approach, and we make sure that if we were to move forward with something, it would be something that delivered against our strategy and provided shareholder value.
Valuation
While The Trade Desk is the thought leader in this vibrant sector, I consider Criteo a strong 2nd tier player with a current transformation to become a full-stack AdTech player. Its transformation also adopts a similar playbook as TTD that while specializing in Demand Side Platform, it also builds direct relationships with the supply side publishers. That together with its global scale, vast client base, sizable revenue (1.5x TTD), makes Criteo a formidable competitor to anyone, TTD included. I believe as Criteo continues to deliver both top/bottom line results like what it did for this quarter to cement a true turnaround story, the market will agree that its mere 5% of TTD market cap is unjustified. My first target is a 100% upside potential, which values Criteo at $4B, still only 10% TTD’s market cap.
Now let us play the devil of advocates, ‘stress test’ Criteo’s intrinsic value under a pessimistic scenario that its transformation doesn’t work, and despite vibrant eCommerce marketing growth, its revenue declines 3% annually for the next few years while maintaining the same gross/net margin.
I use a 5% NPV discount to calculate aggregated cash flow from 2021-2026, I then use P/E 12x and projected $61mil Y2026 net income to calculate its terminal value. Also, Criteo has a net cash position of around $500 mil.
All together its intrinsic value under this highly stressed scenario is only about 20% below its current market cap.
Concluding Thoughts
I am bullish on Criteo especially considering its 100% upside potential and limited 20% downside risk as discussed above.
For anyone who hesitates to enter into a position at its current price due to its recent price surge, you might also consider selling $25 PUT.
One More Thing
I hope you enjoy the article and find the idea worth further exploring. I would like to mention that my last 2 ideas (eBay and SkillSoft) both had a similar investment thesis – solid and profitable business valued at a fair price, and have exciting catalysts for future upsides, and I think it might be worth reading. I would appreciate you following me, and best of luck with your investment.

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