CRITEO SA CRTO S
August 21, 2017 - 1:06pm EST by
Defy_Augury
2017 2018
Price: 47.60 EPS 0 0
Shares Out. (in M): 68 P/E 0 0
Market Cap (in $M): 3 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

Please see my long report for background on the company.

In late May, Criteo fell from 55 to 44 as Apple announced Intelligent Tracking Prevention (ITP) at their developers conference. Essentially, ITP is designed to prevent the cross website tracking that allows Criteo to serve retargeting ads. See this for more detail: https://webkit.org/blog/7675/intelligent-tracking-prevention/. I initially thought the downturn in CRTO stock was an overreaction after ITP was ineffective on early iOS 11 betas. However, since downloading the two most recent betas I am almost never receiving retargeting ads when ITP is turned on. Bottom line, ITP is very effective and this is a big problem for CRTO.

Here are some other key points, many of which the sell side has yet to acknowledge:

(1). ITP is part of mobile

(2). ITP is on by default on iOS 11. There are separate tabs called “block all cookies” and “ask websites not to track me” that are turned off by default but which, when turned off, still don’t allow retargeting ads

(3). Contrary to what management claims, ITP does not break the internet. I have had no trouble doing anything that they claim would become a problem. For example, the WSJ still remembers my password with ITP turned on

(4). Maybe this is just an aesthetic choice or it might suggest increased confidence by Apple, but the tab in question went from being called “Try to Prevent Cross-Site Tracking” on the first beta to  “Prevent Cross-Site Tracking” in the latest update

If you would like to see the effect of ITP yourself:

(1). Download the new iOS beta here https://beta.apple.com/sp/betaprogram/

(2). Click on a few products at a website of a Criteo customer like Nieman Marcus, Uggs, Violet Grey etc.

(3). Go to http://www.criteo.com/demo/ and refresh the page and see if an add from the site you just visited comes up. You can also go to USA Today, macrumors, or other popular publishers to see if an ad shows up but then you add the variable of whether or not Criteo won the inventory.

(4). You may see relevant ads the first or second time you try if you don’t delete your safari history (as I assume most people won’t when they download the new iOS) from some “residual” cookies, but after a one or two free passes I’m only being shown an add like 10% of the time.

(5). Repeat steps 2 and 3 with ITP turned off and notice how you get a retargeting ad every time.

To assess the downside I use the framework from a Suntrust note to estimate the total percent of CRTO net revenue at risk from ITP, which ends up being about 13%. This takes into account safari browser share and CRTO revenue share in different parts of the world and excludes app revenue which doesn’t appear to be as threated by ITP.

 

Desk

Mobile

Total

% of CRTO Net Rev

33%

67%

100%

% In App

0%

30%

30%

CRTO Net Rev ex app

33%

37%

70%

US % of CRTO Rev

35%

35%

 

Safari US Share

10%

52%

 

Non US % of CTRO Rev

65%

65%

 

Safari Global Share

5%

18%

 

At Risk Rev

2%

11%

13%

 

So 13% of net revenue is at risk if this were a 100% effective. Although it appears to be about 90% effective in my tests, I assume its just 50% effective so 7% of net revenue is lost. For simplicity, I then take the consensus 2018 sell side EBITDA estimate of 376mm and subtract 7% from it to get 351mm. Tagging on a 7x multiple, about where the multiple has bottomed in the last two crises, I get a $40 target.

Risks

Bad Test. My early tests were wrong so maybe this test is wrong too. However, I have more confidence that the latest beta is much closer to what will come out in September than what I was testing in June.

Hooklogic. I am still bullish on the Hooklogic acquisition and the sell side may be underestimating the growth it will provide. Upside from Hooklogic might be enough to offset lost revenue from ITP.

Criteo Changes Technology and/or Publishers Change Safari access to Sites to Get Around ITP: I think these are possible over time, but it would probably take at least a few quarter to get to this point, if it is possible. It’s not like Apple will be standing still either.

 

Multiple Doesn’t Contract as Much as I Anticipate: Even with ITP, the EBITDA estimate I gave above would still imply growth of 18% between 2017 and 2018. You could argue that this would still deserve a multiple of at least 8x adj EBITDA (excludes stock comp which is pretty big) even with this slower level of growth. However, as someone who has owned this on the long side can attest, the market has been very unforgiving to any threats this company has faced given the poor history of ad-tech companies. Given that I think the probability that Criteo will be able to adjust to this threat is lower than what I thought for header bidding (because header bidding was being implemented by publishers who partner with Criteo and rely on advertising rather than the largest tech company in the world that doesn’t really rely on ads and is using privacy to differentiate itself from competition), I think it is likely the multiple compresses to at least the 7x level it reached during header bidding panic.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

iOS 11 released in September or sell side starts doing its own tests beforehand

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