Criteo's Underestimated Growth Pivot Is Finally Getting Some Credit

seekingalpha02-15

Criteo is transitioning from a cookie-dependent retargeting tool to a SaaS adtech provider.The decline of the retargeting revenue line is already priced into the company's valuation, while the growth ...

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21:12 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4670485-criteo-underestimated-growth-pivot-is-finally-getting-some-credit><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Criteo is transitioning from a cookie-dependent retargeting tool to a SaaS adtech provider.The decline of the retargeting revenue line is already priced into the company's valuation, while the growth ...</p>\n\n<a href=\"https://seekingalpha.com/article/4670485-criteo-underestimated-growth-pivot-is-finally-getting-some-credit\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE0009356076.USD","symbol_name":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) 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SGD-H","BK4503":"景林资产持仓","LEVI":"李维斯"},"translate_title":"Criteo被低估的增长支点终于得到了一些信任","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"WMT":1,"LRLCF":1,"LEVI":1,"BBY":1,"IAS":1,"DROOF":1,"DIS":1,"CRTO":1,"CMCSA":1,"MSFT":1,"PG":1,"RAMP":1,"SCOR":1,"UDIRF":1},"content_text":"Criteo is transitioning from a cookie-dependent retargeting tool to a SaaS adtech provider.The decline of the retargeting revenue line is already priced into the company's valuation, while the growth potential of its retail media solutions is overlooked.Criteo is adapting its technology and strategy to survive in a cookie-less world and has shown strong growth in its Commerce Audiences and Retail Media solutions.wildpixel Investment Thesis Criteo (NASDAQ:CRTO) is at a critical juncture of its transition from a cookie-dependent retargeting tool to a SaaS adtech provider. The inevitable decline of the retargeting revenue line appears fully priced into the company's depressed ~5x Enterprise Value/EBITDA multiple, while the growth potential of its retail media solutions is not being given due credit. With favourable macro and industry tailwinds into the new year, we see significant upside potential from the company's current share price. Business Model Under Transformation Initially, Criteo's business model was heavily reliant on cookies, small text files used to track users' online activities. By leveraging cookies, Criteo could collect vast amounts of data on users' browsing behavior, preferences, and purchase history. This data enabled highly personalized ad targeting and retargeting, where ads are tailored to users based on their previous online actions, significantly increasing the relevance and effectiveness of online advertising campaigns. Using this technology, Criteo established itself as a leader in data-based marketing and media monetization, serving 2,600 brands (including household names such as Microsoft (MSFT), Levi (LEVI), Procter & Gamble (PG), and L'Oréal (OTCPK:LRLCF)), 16,000 performance marketers (such as Shopify), 220 retailers (like Walmart (WMT), Best Buy (BBY) and Deliveroo (OTCPK:DROOF)), and 75% of comScore's (SCOR) top 100 publishers (e.g. Disney (DIS), Comcast (CMCSA), and United Internet (OTCPK:UDIRF)). However, the cookie-based advertising loop is being challenged by several factors. Privacy regulations like the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the U.S. have imposed stricter controls on the use of personal data for advertising, impacting the use of cookies for tracking and personalization. Major web browsers, including Safari and Firefox, have also implemented their own measures to block third-party cookies by default, and Google has announced plans to phase out third-party cookies in Chrome. Additionally, a general growing awareness and concern over privacy has led consumers to be more cautious about how their online data is used, with many opting out of tracking altogether. All combined, these changes amount to a complete disruption of cookie-based advertising, and we view them as posing an existential threat for players like Criteo, which still relies heavily on cookies. Without cookies, it becomes significantly harder to target the right potential customers at the right time of their browsing / shopping journey, requiring greater advertising spend to achieve the same or inferior results. In response, Criteo has been adapting its technology and strategy to survive and hopefully thrive in a cookie-less world. At a high level, Criteo is preparing for the future of addressability by emphasizing in its tech and product architecture the scalability and interoperability of solutions. Their commitment includes testing and sharing findings on various addressability solutions, contributing to an open and unified ecosystem for all stakeholders. More specifically, the company has launched a first-of-a-kind product that connects first-party commerce data with real-time contextual signals. This approach allows marketers to drive and measure incremental revenue in a post-cookie world, leveraging machine learning and artificial intelligence to classify content on the open internet more effectively. This solution enables personalized experiences through product recommendations based on cookie-free contextual signals. Criteo has also rolled out a Traffic Generation targeting tool in beta to more than 750 of its clients. This tool utilizes real-time, first-party data to help advertisers connect with prospects in high-intent moments earlier in the sales funnel. Features include multiple audience targeting capabilities, such as lookalike audience targeting and Commerce Audience, which aggregates in-market audiences using Criteo's first-party data. In our view, the demand for contextual advertising solutions will skyrocket in the coming years, as marketers will scramble to target audiences efficiently without cookies, and first-party data will play a critical role in maximizing the accuracy of contextual campaigns. The goal of these initiatives, among others, it to future-proof Criteo, allowing it to become a leading cookie-free digital advertising player, and we believe the company is on the right path. However, as of today, the company's business model is still heavily reliant on cookies, with 44% of revenue driven by Criteo's Retargeting solution. Cookies are central to Criteo's retargeting solution because they enable the collection of detailed user behavior data across multiple websites, which is essential for creating personalized advertising experiences. Facing the deprecation of cookies, Criteo's revenue has been steadily declining in recent years - and we expect that the Retargeting segment will maintain this trend for the foreseeable future. Shifting Financial Profile Primarily due to its reliance on cookies and the evaporation of this revenue stream for the factors outlined above, Criteo's revenue has declined from $2.3 billion in 2018, to $1.9 billion in 2023. This 15% decline is particularly staggering to us when considering the general trend in the market in which Criteo operates: while Criteo's revenues shrunk, the global digital advertising market more than doubled in size during the same period. The fault lies squarely with the company's retargeting solutions, which declined 15% in 2022, 12% in 2023, and, per company guidance, is expected to decline a further 30% by 2025. In contrast, revenue from Criteo's other products is showing healthy growth rates: Commerce Audiences grew 30% in 2023, and Retail Media 27%. By tapping into real-time shopping data, Commerce Audiences enable marketers to create highly targeted campaigns that reach users who are actively browsing the web and are likely interested in their brand or products. This approach is particularly powerful for full-funnel marketing, allowing for precise targeting from awareness through to conversion. Retail Media specifically helps retailers and marketplaces to control, scale, and maximize the monetization of their digital and physical assets. The recent strong revenue performance of Criteo's Commerce Audiences and Retail Media solutions can be attributed to several key drivers. The most powerful driver is the underlying market growth: as alluded to earlier, the digital advertising market more broadly continues showing resilient double-digit growth, including throughout the Covid-19 pandemic and more recently even in a macroeconomic recession scenario. This market is expected to grow an additional 50%, or c.$300b, between 2023 and 2028 - a tide that will lift all boats with a foothold in this market, where we see Criteo as particularly well positioned. Secondly, Criteo benefits from a state-of-the-art-product: same-retailer Contribution ex-TAC retention rate for Retail Media stood at 121% for Q4 2023, indicating high customer satisfaction and stickiness within Criteo's Retail Media offerings. 70% of retailers have an exclusive partnership with Criteo, and the number of brands on this solution has tripled in the last 3 years, two extremely positive signals in our view. The expansion of platform adoption by large retailers such as Rite Aid, ASOS, and Sundrug also contributed to this growth. Lastly, Criteo's management has a demonstrated track record of value-added strategic acquisitions, such as Brandcrush in March 2023. This transaction aimed to provide Criteo's customers with a holistic omnichannel monetization platform globally by integrating additional capabilities, including in offline media. Criteo also notably purchased IPONWEB back in December 2021, integrating their DSP and SSP capabilities, and Mabaya in May 2021, bringing onboard its ecommerce inventory monetization capabilities. We see these acquisitions as strategically targeted, deliberate, and evidence of the company's awareness of a much-needed pivot in its business model. Financial Outlook The company's latest financial results for Q4 2023, published on February 7th 2024, were consistent with the trends outlined above. Q4 revenue from Retargeting solutions declined 8% year-on-year, while Retail Media showed a remarkable 28% growth and Commerce Audiences an even higher 61% increase. These are overall very positive signs - the decline in Retargeting seems to be plateauing (when contrasted with the 21% decline observed in Q4 2022), while Commerce Audiences and Retail Media growth shows no signs of slowing down. Over time, we expect Retargeting solutions revenue to trend towards zero, and the other segments (Retail Media and Commerce Audiences) to become the main revenue drivers. This shift in revenue mix should, in our view, unlock a return to steady organic double-digit growth, starting already in the first quarter of 2024 as indicated by management guidance. As the chart below shows, publicly listed peers in the AdTech sector display an exceptionally strong correlation between their projected revenue growth rate and their current market value as measured by the Enterprise Value / EBITDA multiple, which is the standard valuation metric in the AdTech industry. As a result of Criteo's challenged business model and lacklustre performance in recent years, it currently trades at 5.0x EV / EBITDA, even with the recent share price jump of c.20% as the market reacted favourably to the company's Q4 results. S&P Capital IQ As the company continues to deliver on its growth rebound story, we believe the market consensus growth rate should shift upwards, and we would expect to see a corresponding increase in the company's multiple. The upside is significant - we could potentially see a tripling of Criteo's current multiple, if we consider as reference points the multiples of LiveRamp (RAMP) and IAS (IAS) which are growing around 15% (note Criteo management guidance of 10-12% revenue growth for FY2024). Assuming Criteo roughly maintains its current EBITDA margin of 30% and delivers on its guidance of \"mid-single-digit\" revenue growth for 2024 (which we view as a conservative management estimate), ramping up to 10% growth in 2025, the company should deliver a 2025 EBITDA of c.$350 million. In 1 year (February 2025), that EBITDA figure would then warrant a valuation of:  In a conservative scenario, at the current EV / EBITDA multiple of c.5x, an enterprise value of $1.8 billion (implying an equity value of c.$2.0 billion), delivering a 1-year return of c.13% from the current share price. In a bull scenario: assuming a multiple re-rating (which we believe is justified by the shift in growth profile alluded to above) to 10.0x, an enterprise value of $3.5 billion (implying an equity value of $3.7 billion), delivering a 1-year return of c.110% from the current share price.  Realistically, we expect the company to land somewhere in between these two scenarios, i.e. with a one-year forward EBITDA multiple in the high single-digit range, unlocking a 1-year return in the high double-digit range (specifically, c.60% implied by an arithmetic average of the conservative and bull scenarios). Key Risk Factors The most meaningful risk for Criteo, and most AdTech businesses, is, in our view, an unfavourable macroeconomic environment. The advertising sector is known to be highly sensitive to economic cycles, and downturns can lead to reduced advertising spend, directly impacting Criteo's revenue. There's also the risk of a faster than anticipated decline in Retargeting revenue, which still forms a substantial part of Criteo's business model. As the digital advertising industry shifts away from third-party cookies, significantly impairing Criteo's ability to target and measure the effectiveness of ads, we believe this segment will see continued pressure. Lastly, the regulatory and even commercial landscape regarding user privacy will continue presenting a risk. Changes in data privacy laws and regulations, particularly those concerning online advertising and consumer data protection, can introduce new compliance requirements or restrict certain advertising practices. Dominant players like Apple and Google may continue to tighten access to their respective walled gardens, undermining business models of third parties who rely on these platforms. This evolving environment can impact Criteo's current strategy and trigger a need for further adjustments, potentially at significant cost or disruption. Conclusion At its current valuation of approximately 5x EV/EBITDA 2024, Criteo appears undervalued, especially when considering the growth potential of its Retail Media and Commerce Audiences solutions, which in our view are clearly not fully accounted for in its market price. Considering the broader digital advertising market's growth trajectory and Criteo's strategic investments in complementary technology and acquisitions, the company is well-positioned to benefit from industry tailwinds. Criteo's focus on Retail Media, in particular, stands out as a significant growth driver, supported by high retention rates and exclusive partnerships with leading retailers.  This underappreciation of Criteo's growth prospects, coupled with its proactive adaptation to ongoing disruptive industry dynamics, positions Criteo as a compelling Buy opportunity right now. For investors willing to look beyond the near-term challenges associated with the transition away from cookies, Criteo presents an attractive investment opportunity with considerable upside potential.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2411054846"}