CDLX - Cardlytics Still Has Runway After Recent Rally

2023-08-07 14:52:54 ET

Summary

• Cardlytics stock prices have surged 181% recently, rebounding from market skepticism.
• The company's Q3 results showed growth in revenue, billings, and gross profit, signaling high-quality deals on the platform.
• The improved user experience and new initiatives have added stability and retention to CDLX's platform relationships with banks.
• Activation and ARPU are not as impressive as expected.

Cardlytics, Inc. ( CDLX ) has recently witnessed a significant uptick in its stock prices, surging 181% since my last analysis . I believe this recent rally is merely a rebound from prior market skepticism. As worries about free cash flow and profitability wane, I think there's further room for growth ahead.

Business upgrade

In the recent quarter , revenue reached 76.7M, marking a 2% rise from the 75M recorded in Q2 2022. Billings also saw a 2% boost, landing at 109.4M from last year's 107.7M. The company showcased a significant gross profit of 30.5M, reflecting a 13% year-on-year ascent from 27M in the corresponding quarter of 2022. The adjusted contribution stood at 37.5M, a 7% surge from 35.1M in the previous year. The elevated growth in adjusted contribution compared to revenue and billings signals high-quality deals on the platform. This is further evidenced by the record third-quarter gross margin rate of 39.79%. While both adjusted EBITDA and net income remained in the red, there's a silver lining: the quarter reported a positive operating cash flow of 5.7M. In the conference call, the CFO expressed strong confidence, forecasting both operating cash flow and adjusted EBITDA to turn positive annually from 2024 onwards. This paints a promising trajectory towards sustained profitability which I think is a major reason for the recent upswing in stock value.

The improved user experience is evident

In the previous quarter, there was growth in consumer engagement, with total activations soaring by 10%, and redemptions by 7%. One noteworthy development has been the 100% implementation of the new user experience by Chase, along with progress on the new ad server and cloud migration. Even though these advancements were anticipated, their successful execution, particularly the new UI that hadn’t been changed for 12 years, marks a significant milestone. Another promising initiative is the Ad Decision Engine, aimed at driving business relevancy. Although not fully deployed, early signs are encouraging; banks utilizing this engine have seen a 10% rise in billings and a 6.5% increase in activations.

The new management’s efforts at enhancing CDLX products have yielded better results, with new UI and decision engines offering more personalization and differentiation for consumers across various banking partners. These improvements have added stability and retention to CDLX's platform relationships with banks.

Furthermore, there has been a favorable shift in in-store channels, growing from 34% to 71% of total spend, showcasing CDLX's ability to stimulate local spending. This development aligns with CDLX's core strength in geographically understanding its consumers, a feature that is also likely to be appreciated by partnering banks.

Some of the key KPIs are lagging

While CDLX has made notable strides in product enhancement, some outcomes haven't lived up to expectations. In the last quarter, the number of unique consumers grew by a modest 4%, and MAUs saw a 5% year-over-year increase, reaching 188M. Surprisingly, ARPU remained stagnant at $0.38 same as 2022. When analyzing offer activation rates, only five categories outperformed the previous year, down from six in the earlier quarter. This discrepancy might be attributed to the growing and diverse advertiser base. Still, the leadership team at CDLX needs to boost both ARPU and activation rates.

Although the user interface provided by Chase shows improvement, other banking partners like Bank of America present too many offers, complicating the navigation and making it challenging for consumers to recall which they've activated. Given that CDLX is competing for the limited attention and time from average consumers, significant changes in consumer behavior on their platform have proven to be not easy. Yet, for CDLX to truly amplify its business model, enhancing these unit economics is a must for shareholders.

Price Actions

When it comes to price movements (chart below), the chart below shows the price action characteristics between 2022-10-17 to 2023-08-03. CDLX showed wider daily return fluctuations than the market average, with a standard deviation of about 10x of SP500. This is crazy volatility compared to the overall market. Most days have negative returns but outperform SP500 overall. The stock often traded in an intraday range, with most times dropping or raising an average of 5% from the open price. When shocking good/bad news comes, you could easily see one day fall for 20%+. There was one time it dropped 50% in a day from the open.

When assessing the correlation ratio of CDLX prices against major sector ETFs (as detailed in the table below), it's evident that CDLX aligns most closely with sectors such as Consumer Discretionary ( XLY ). Yet, the highest observed correlation ratio sits at just 0.54. This suggests that CDLX's price movement remains predominantly independent of the broader market trends.

Bottom Line

In my view, the core dynamics of CDLX remain fairly consistent. The company continues on its path of fortifying ties with Financial Institution ((FI)) partners and advertisers. Anticipated collaborations with new banks should provide a substantial boost to revenues. Furthermore, renegotiating revenue shares with Chase is poised to yield immediate profit margins. There's also potential on the horizon for CDLX to introduce charges on ad spending linked to activations. The transformation of the Bridg business into a retail media network, prioritizing tools for ad campaigns, seems like a strategic move, especially considering it resonates with CDLX's existing strengths. The introduction of receipt-level offers is particularly intriguing, as it promises to unlock a vast, untapped market segment for CDLX. In the grand scheme of things, CDLX's most invaluable resource remains its vast scope and reach. With the current leadership team and maintaining a steady execution strategy, I foresee the company's stature only amplifying over time.

When it comes to valuations, I maintain a bullish stance for the long-term trajectory. An ARPU of $0.38 in the latest quarter seems notably modest. With improvements in personalization and an enhanced user experience, there's ample room for ARPU to rise. Moreover, the business no longer necessitates substantial capital investments (no huge share dilution anymore). Overall, the EV/Sales ratio of 2.4 still seems to be undervalued given the market position and growth potential.

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