Description

Thesis

·         The market doesn’t understand the business quality and long-term earnings power of Cardlytics (“CDLX”). We think CDLX is a monopoly that will earn $30 EPS in 10 years based on 250MM monthly active users and $10 ARPU.

·         CDLX operates a purchase intelligence platform that connects marketers, financial institutions, and consumers via cash-back rewards in banks mobile and web applications. The company uses online and offline purchase data from more than 2,000 bank partners to help marketers reach the right consumers and precisely measure their advertising spend.

·         The CDLX platform offers compelling benefits to all stakeholders:

·         Marketers have access to a large and engaged audience (150MM monthly active users and growing) where they can find high potential new customers that are active in their category, but not currently shopping with them, or to grow their business with existing customers. The platform’s marketing is targeted and measured with each individual customer’s actual spending information and generates an industry leading return on ad spend of 30x.

·         Banks are able to increase customer loyalty and engagement with little effort on their part, as Cardlytics handles everything from contracting with marketers, building, running and reporting performance of the marketing campaigns to allocating incentives to bank customers. In addition, the bank also participates in CDLX revenue opportunity through revenue share agreements (roughly 50% of the revenue CDLX generates).

·         Bank consumers benefit by receiving relevant advertisements and rewards tailored to their specific needs based on their specific purchase history. Since inception, CDLX banks customers have earned more than $350MM in aggregate cash back rewards.

·         CDLX is a monopoly due to:

·         The largest banks don’t have enough monthly active users (MAUs) to be relevant to marketers and the business has a fixed cost structure; therefore a third party like CDLX maximizes revenue and minimizes costs for banks.

·         Winner take all network effects where selection of banks determines selection of marketers and vice versa (the more banks you have the more marketers you have). Cardlytics kicks back roughly 50% of revenues to bank partners so a smaller competitor with less marketers and marketing spend would provide an inferior experience for a bank’s consumers and less revenue to banks.

·         Cardlytics is the exclusive and sole supplier to a bank as mobile and online banking portals are not conducive to supporting marketing content from multiple vendors. There are also high technological integration and switching costs for bank partners (CDLX operates behind bank firewall) so once Cardlytics is in it is unlikely they will be ripped out.

·         ARPU is expected to grow significantly from engagement growth and pricing increases:

·         Banks are increasingly becoming technology/software companies and steering customers towards mobile applications to lower costs and increase revenues, customer satisfaction, and loyalty.

·         There are positive network externalities between marketers, banks, and consumers that should create a powerful flywheel. CDLX historically underpriced the platform to attract advertisers because it was subscale. Now that JP Morgan and Wells are CDLX bank partners, channel checks with marketers indicate this channel has exploded over the past year as marketers are recognizing the scale and quality of the platform and how under-priced it is given the high ROI. The increasing selection of marketers is driving increasing engagement from consumers as they are receiving more targeted and relevant rewards. This increasing consumer engagement is driving competitive response from marketers not on the platform to join the platform, which in turn increases customer engagement. As more marketers join the platform, Cardlytics can raise prices. Also, the increasing consumer engagement is driving competitive response from banks not on the platform to join the platform (or if they are on the platform to upgrade their UI so rewards section is as prominent as Chase, BofA, etc) or they risk losing consumers to banks that are on the platform.

·         Cardlytics currently has approximately 150MM MAUs and their best performing bank partners are doing approximately $4 ARPU. We think 10 years from now they’ll have about 250MM MAUs and will be doing approximately $10 ARPU (similar to Yelp, Snap, and Pinterest current ARPUs). This combination would produce $2.5B revenue, roughly 50% of which is kicked back to bank partners. The company should have roughly $200MM in operating expenses, which results in approximately $750MM of net income and $30 EPS.

Risks

·         The company is currently dependent on Chase, Bank of America and a limited number of other bank partners. These large bank partners could discontinue or deemphasize the CDLX platform in their mobile and web applications, which could reduce consumer engagement and revenue to CDLX.

·         A breach of the security of CDLX systems could result in a third party’s entry into their bank partners systems, which could be detrimental to CDLX business, financial and operating results.

·         The implementation of Wells Fargo has not been completed. Bringing new bank partners into the CDLX network requires considerable time and expense and can be long and unpredictable.

·         Legislation and regulation of online businesses, including privacy and data protection regimes, is expansive, not clearly defined, and changes rapidly.

Catalyst

Growth in MAUs and ARPU