Critical Mass

Company overview

Criteo is an advertising technology company that was a three man start-up in Paris in 2005 before launching its first product in 2008. It sits in a space (adtech) that is highly competitive, at the mercy of being sandwiched between giant customers / suppliers, and constantly evolving – don’t throw the whole segment in the bin yet though, as Criteo is a platform that has proven useful to customers with its data driven offering.

At its core Criteo is a retargeting company – this means that if you browse for flights on Expedia and then don’t end up buying them, ads for those flights you were looking at or similar flights that are predicted to be likely purchase items for you will be “re-targeted” to you on other platforms (e.g. while you browse Facebook or a news website). This is known as programmatic advertising whereby display ads are not random but rather programmed for you. Criteo is a market leader within this niche.

How does it work?

Criteo connects with an eCommerce retailer through first party data integration. We will continue with the Expedia example: Criteo will form a direct sales relationship with Expedia and establish a campaign based on which customers they seek to target and how they would like to reach them. Then Criteo will gather data on Expedia customers when they browse on the Expedia website as it will now be embedded with the Criteo cookie. This data is matched to an identifier (random character sequence, not your name to ensure privacy is protected) and then collated with the users browsing activity across all other platforms Criteo has access to. From these disparate data sources, Criteo’s purpose built engine is able to form a mosaic of each users browsing and purchasing patterns and able to craft personalized programmed targeted ads. Criteo’s engine utilizes this data to calculate the cost-benefit of placing an ad in front of a user live (in under 150 milliseconds) as they scroll Facebook, based on that users click/purchase probability and the traffic acquisition cost (“TAC”) of placing that ad in front of them. This allows Criteo to place real-time bids on ads on Facebook only when the engine predicts a profitable spread may be made by Criteo as it charges on a cost-per-click (“CPC”) basis. This is an advantage as display advertising is increasingly shifting to a real-time bidding model on websites as programmatic increases in popularity for advertisers. These ads are intended to deliver the right product placement at the right time in order to increase advertising ROI. This is the core of “programmatic” retargeting advertising and it is experiencing rapid growth transforming display advertising from its previously scattergun approach (where advertisers pay on vague cost per view metrics) to a targeted higher ROI advertising method that instead is charged on a CPC basis.

This method arguably creates a positive feedback cycle for Criteo’s data advantage. Through their existing partnerships they have access to >$550bn of annual online sales, or 1.2bn+ active monthly shoppers. They are then able to reach and re-target these shoppers through thousands of direct publishers (think the Washington Post, or ESPN). Due to their rich data set and personalized ads they are able to generate industry best ROIs for advertisers, generating >$27bn annual post-click sales for >15,000 retailers. This feeds back into the loop by increasing their access to commerce data and hence the Criteo engine should continuously be improving advertiser ROI as it accesses more and more user behavior and creates a more refined profile of each user as the platform reaches critical mass with its data sets.

In its current form, Criteo is the leading independent re-targeting platform however it can leverage its data set to garner more of the ad spend pie. A new vertical that Criteo mgmt. have focused on is Commerce Marketing, or inspiring people to buy things. Using their identity profile of users, they can work with retailers and brands to target specific demographics that are likely to engage with a brand and accordingly place ads for products in front of those users at the right time on the right website/app. This will likely increase in importance in the future as the trend toward programmatic ads play out in various forms for online display and Criteo shifts from being able to only target a single product purchase to instead acquiring customers.

Off a cliff


The share price has been on a steady descent since May as shown above as it has been increasingly subject to negative sentiment due to the announced introduction of Intelligent Tracking Prevention (“ITP”) by Apple to Safari. What this technology intended to do was cut Criteo off at the source by not allowing their cookies to track user activity on Safari hence Criteo could not re-target ads to users as it is unable to view their browsing. Criteo management initially had a technological workaround that was going to mitigate c. 50% of the impact from the protocol change, yet the stock continued to be pressured. The negative sentiment was eventually justified when last week the stock dropped 25% in a day as management announced the iOS update blocked their workaround and therefore instead of the revenue headwind from ITP being 9-13% as initially guided, it would likely represent a 22% drag on 2018 revenue as they were cut off from access to Safari. The harsh reaction of the market to this news likely prices in the worst case scenario for ITP with Safari sourced revenues lost for perpetuity. This may be an overreaction by the market or it may be the market punishing mgmt. for inadequately communicating the Apple policy shift and misguiding the impact initially.

What am I investing in?

After speaking to a friend who looked at Criteo to invest in recently, he told me that after some diligence he realized ultimately it wasn’t a scalable tech story but instead an ad agency which sells digital content. It is worth noting Criteo has a direct relationship with 87% of its clients so this assertion appears valid especially when considering the required sales network to support revenue growth. To evaluate it as an ad agency, we must instead look at the unit economics of the business to assess profitability, sales and marketing productivity (customer acquisition cost), and retention rates / churn.

CRTO Financials

From the above historical financials (2013 -16 was a period of high growth) we can see what Criteo’s cost structure looks like with R&D running at 14% to maintain product development, S&O is 35 – 40% in order to acquire and service customers, while G&A slowly sees the benefit of operational leverage. Given the hit from ITP, it is likely EBITDA margins will contract substantially from the c. 30% LTM due to inability to nimbly right size the sales force.

Given Criteo’s business model appears consistently profitable with incremental S&M driving top line growth, the critical operational metric is churn which will define unit economics. This gauge of customer satisfaction should be the key warning sign to assess in each quarterly update from the company. Criteo has maintained c. 90% retention rates for the past five years along with strong net client adds each quarter while 78% of their LTM revenue ex-TAC came from uncapped client budgets. Given their performance thus far it appears investing in Criteo’s ability to continue to build strong client relationships and maintain access to client ad budgets is a worthwhile proposition.


Fraud: As an ad agency, client satisfaction is critical and any dent to Criteo’s reputation could be fatal to the business. Gotham City Research have released numerous reports that claim Criteo garners clicks from fraudulent websites and clickbots that misstate effectiveness of campaigns. Such claims may be true given the difficulty in validating adtech data and nascent shift to online ad spend for brands with many still working out optimal digital strategy, however it is difficult to qualify this claim. Criteo’s historical retention rate and same client spend growth suggests clients have been overwhelmingly supportive of their platform thus far.

Privacy: Increasing concern about use of cookies is a constant risk to adtech players. It is this concern that led Apple to prevent tracking by implementing ITP on Safari. There is a risk that this may have a spillover effect to the rest of the Criteo ecosystem as customers may perceive Criteo’s targeting as limited. European regulatory changes to be implemented should have a limited impact on Criteo, while Chrome is unlikely to mirror Apple’s browser change as it would adversely impact advertisers and hence the Google advertising platform. Also Apple is unlikely to extend ITP to AppStore applications as this would impact those apps attractiveness to advertisers and publishers would migrate to Android, harming the iOS ecosystem

Market power: Criteo is the largest independent in a space dominated by two giants, Google and Facebook. They control the majority of online ad spend and offer advertisers comprehensive advertising solutions, therefore they may look to further pressure adtech players by replicating their business models at scale. Criteo does offer an alternative to publishers and brands otherwise being forced to pass on all their sensitive customer information to Google and Facebook, which they may be averse to


Criteo has an attractive business model due to its high margins and growth which is relatively capital light (R&D at c. 14%). This lends itself to an attractive cash flow generation profile which will consistently de-risk the stock.

On a trailing basis (2017) the company trades on a P/E multiple of c. 9.5x and EV / EBITDA multiple of c. 4x. These attractive low multiples don’t look so rosy on a forward basis as consensus 2018E EPS forecasts a 50% drop in EPS, even though revenue is roughly flat year-on-year. Non-Safari business growth is expected to offset the 22% revenue hole left by the loss of Safari revenue. The significant EPS fall is due to the significant deleveraging as Criteo will have an inflated cost structure (Sales personnel) as they did not plan for ITP revenue contraction.

Despite the temporary earnings pressure posed by ITP in 2018, the company will continue to be cash flow generative and by end of 2017 it will have 25% of its current market cap in cash.


Criteo is a risky investment. Remain cautiously optimistic due to valuation, cash flow generation and entry point. Ultimately the risk of permanent capital impairment is evident as Criteo may be threatened by regulatory changes to protect consumer privacy, fraud risk attached to opaque advertising practices, or changes in tact by either Google/Facebook to apply more pressure to independents. Despite these risks, at current levels it is worth investing a smaller stake in Criteo as the risk/reward appears to offer reasonable upside over the medium term. Long term growth remains attractive due to the rise of programmatic advertising, and buying it today on a trailing EV/EBITDA of 4x (a fair indication of Criteo’s earning power) offers upside.

Disclosure: I am long Criteo (NASDAQ: CRTO)