CRTO - Criteo Sees Demand From Major Retailers Aiming For Online Growth

2023-04-24 19:18:15 ET

Summary

• Criteo S.A. provides online digital marketing solutions to retailers and other companies worldwide.
• The firm is growing revenue and has de-risked from the online advertising attribution challenges recently.
• CRTO may be protected in a macroeconomic downturn as retailers look to more efficient online marketing solutions.
• My outlook on CRTO is a Buy at around $30.00 per share.

A Quick Take On Criteo

Criteo S.A. ( CRTO ) is a digital marketing software and service provider for retail advertisers seeking improved connections with customers and prospects.

While retail growth may be hampered by a wider macroeconomic slowdown, retailers may choose to double down on more effective online marketing, increasing demand for Criteo’s solution set.

My outlook for CRTO is a Buy at around $30.00 per share.

Criteo Overview

Paris, France-based Criteo was founded in 2005 to provide a range of services and online advertising demand-side software solutions for businesses worldwide.

The firm is headed by Chief Executive Officer Megan Clarken, who was previously Chief Commercial Officer at Nielsen and previously held various technology consulting positions.

The company’s primary offerings include the following:

• Commerce Growth - automated acquisition

• Commerce Max - demand side retail-centric media

• Commerce Yield - future for large media buyers

• Commerce Grid - future for specialty retailers

Criteo acquires customers through its direct sales and marketing efforts, social media, search engines, partner referrals, advertising agency outreach and industry events.

Criteo’s Market & Competition

According to a 2022 market research report by Fortune Business Insights, the global market for demand-side advertising was estimated at approximately $17 billion in 2021 and is forecast to reach $92 billion by 2029.

This represents a forecast CAGR of 23.7% from 2022 to 2029.

The main drivers for this expected growth are growing internet and mobile device usage, demand for data-driven advertising, the need for advertisers to increase the efficiency of their online marketing programs and the increasing popularity of various video and audio formats, increasing the complexity of online advertising environments.

Major competitive or other industry participants include:

• The Trade Desk (TTD)

• AdRoll

• Google (GOOG)

• Adobe (ADBE)

• Verizon Media

• AppNexus

• Facebook (META)

• MediaMath

• Viant Technology (DSP)

• Taboola (TBLA)

• Yahoo!

Criteo’s Recent Financial Trends

• Total revenue by quarter has trended lower in recent quarters, as the chart shows below:

• Gross profit margin by quarter has moved higher in successive quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended higher, a negative development as the firm is spending more to add the marginal dollar of revenue:

• Operating income by quarter has been volatile in recent quarters:

• Earnings per share (Diluted) have trended lower and produced more volatility recently:

(All data in the above charts is GAAP)

In the past 12 months, CRTO’s stock price has risen 21% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) fall of 4.1%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $373.3 million in cash, equivalents and short-term investments and $300,000 in total debt.

Over the trailing twelve months, free cash flow was an impressive $171.2 million, of which capital expenditures accounted for $84.8 million. The company paid $65.0 million in stock-based compensation in the last four quarters, a three-year high on a rolling twelve-month basis.

Valuation And Other Metrics For Criteo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

CRTO’s most recent GAAP Rule of 40 calculation was negative (4.3%) as of Q4 2022’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Criteo

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted how the firm has been able to de-risk its ‘business from the third-party cookie deprecation challenges facing the industry.’

Leadership believes its Commerce Media platform is well-positioned for offering a ‘complement [to] Amazon for brands looking to advertise to consumers at the digital point of sale across multiple Retail Media Networks.’

The company has broadened its approach, adding new retailer verticals, and new geographic regions, notably the Asia-Pacific region.

However, the company’s client retention rate was described by management as ‘close to 90%’, indicating only fair product/market fit and moderate sales & marketing efficiency.

Total Q4 2022 revenue fell 13.6% year-over-year, yet gross profit margin rose an impressive seven percentage points to 44%.

SG&A as a percentage of revenue has been trending lower while GAAP operating profit has been volatile in recent quarters.

Looking ahead, management appears focused on maximizing its existing customer base, seeing a threefold potential growth by extending its Retail Media monetization solutions to its largest retailer clients.

CRTO has also partnered with Shopify (SHOP) and in 2022 saw a 36% increase in the number of Shopify merchants using the firm’s solutions there. Management expects to continue devoting resources to grow the benefits of its strategic partnership with Shopify.

The company's financial position is excellent, with ample cash and liquidity, virtually no debt and very strong free cash flow.

In the past twelve months, the firm's EV/Sales valuation multiple has risen from around 0.5x to its current 0.8x, a rise of 38%, as the chart from Seeking Alpha shows below:

A potential further upside catalyst to the stock could include a pause in U.S. interest rate hikes, reducing negative pressure on the stock’s valuation multiple.

It appears Criteo has created an effective closed-loop system of user tracking in conjunction with retailer first-party logged-in data, improving retailer customer attribution understanding and ROI.

While the company's near-term growth may be hampered by a slowdown in retail sales growth as a result of a wider macroeconomic slowdown, retailers may choose to double down on more effective online marketing, increasing demand for Criteo’s solution set.

I believe CRTO has more room to run at its current valuation level, so for investors with a patient time frame, my outlook is a Buy at around $30.00 per share.

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