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)

Sleeping Beauty


Up over 275% since its ASX debut… is BWX expensive? This sleeping beauty could be about to wake up as a tenbagger. 

Image result for sleeping beauty
Step 1: Good skincare regime; Step 2: Profit


BWX is an Australian based owner, producer and distributor of the following personal care brands: Sukin, DermaSukin, Uspa, Edward Beale, Renew Skincare, and Mineral Fusion. It originally started out as a contract manufacturer to the skin care industry but over time transitioned to being a vertically integrated skin care company by purchasing brands. As it stands today, the third party manufacturing side of the business has shrunk as the focus of the company is solely focused on its flagship brand, Sukin. It represented 83% of revenues in FY16 and is set to grow, while it is already the No. 1 selling skin care brand in Australian pharmacies.

Brand positioning

Sukin is positioned as a “masstige” product with pricing being accessible to the mass market but offering luxury characteristics. Strong category growth of the natural skin care market has been supported by a shift in consumer preferences towards: cleaner and greener products, increased health and safety concerns, environmental concerns as well as awareness of the potential threats posed by synthetic chemicals commonly found in skincare products. This trend is here to stay as millennials drive the eco-conscious consumer mindset, but most current natural products command a material pricing premium to chemical based counterparts. Sukin sets itself apart by offering a vegan, carbon neutral, chemical free, paraben free natural product at almost the same price as standard products. This ethos is aptly captured by their motto printed on each of their bottles (which is recyclable, of course) – “Skincare that doesn’t cost the earth

Sukin range

BWX’s natural skin care focus represents advantageous category exposure. FMCG itself is seen as a defensive sector as people still brush their teeth and wash their hair in an economic downturn (one would hope), but home and personal care (“PC”) specifically is seen as an attractive segment due to higher margins. As a result PC focused stocks (Procter & Gamble / Beiersdorf) command a valuation premium to Food FMCG stocks (Nestle / Danone). Within PC, the largest market is skincare, which is expected to post the strongest market growth from CY14 – 19 (per Euromonitor estimates). Drilling down deeper, the natural segment of the market is expected to grow faster than the overall category. Sukin is well positioned to benefit.

Geographic expansion

In FY16, only 22% of Sukin sales were from overseas. So far, the story has been the domestic success however, over time we the real upside to be derived from RoW sales currently targeted at New Zealand, China, Singapore, Malaysia, UK, US and Canada. The ability for Sukin to replicate its success in these markets represents a vast opportunity with many of the addressable market sizes outstripping local potential (e.g. UK skin care market size is c. 2x Australia).

Management takes a measured approach to new market entry via independent distributors, and subsequently once established they set up a direct distribution office on the ground to service larger clients. This blueprint has been followed in the UK where previously they sold via independent distribution but in mid-2016 pivoted to direct distribution through the establishment of a sales office and warehousing after they secured shelf space with the largest health and wellness retailers in the country. While the success will ultimately be determined by the “pull” from the customer, the driver of earnings in the near term will be the ability of BWX to establish distribution partnerships to “push” the product to as many shelves as possible.

We see promising signs thus far with their entry into the UK as key retailers (e.g. Boots) have increased the number of stores stocking Sukin, with further runway available. While the market opportunity is substantial in the UK, China is a whale of a market for skincare products. Sukin’s reputation is boosted in the eyes of the Asian consumer by the positive connotations attached to the natural healthy Australian image. Just look at Chinese affinity for Swisse pills or A2 Milk to gauge the type of premium attached to Australia’s food, health or natural exports. Initial steps taken by management to establish stores on TMall and are ideal first steps to go direct to the Chinese consumer.


On July 3rd the company announced the acquisition of Mineral Fusion (“MF”), the No. 1 natural cosmetic brand in the US. The deal was fully debt funded for a consideration of US$38.4m, and a $4.6m earn out. The market did not seem to react to the announcement yet this is one of those few times where an acquisition may actually generate a very high IRR for the acquirer, despite the premium transferred to the target. Given the guided EBITDA range for 2017 is US$3 – 4m, this deal looks pricey at first glance given the implied acquisition multiple of 11 – 14x EV / EBITDA however it is worth considering the strategic potential.

Firstly, the factors that make Sukin attractive in Australia make MF appealing in the States. This is clear as its exposure to the natural cosmetics category has helped drive a 3-year sales CAGR of 20%. Secondly, the complementary nature of the acquisition is clear as 77% of 2016 sales for MF were from cosmetics and nail care. MF core sales represent new segments for BWX that will add width and diversification to the BWX stable, allowing BWX to drive more volume through its established distribution in ANZ and abroad. Thirdly, while the US is a massive market with consumer preferences similar to other western countries due to fierce competition and difficulty with distribution it is notoriously tough to build a brand there without burning cash. The MF platform represents a ready-made US distribution arm for BWX to enter the US market, something that may prove invaluable over the long term. Finally, as the acquisition is debt funded it will increase leverage to 2x net debt / EBITDA post integration which, given the cash generation of BWX, will not stress the balance sheet. Rather the utilisation of debt headroom will drive shareholder gains through earnings accretion. Despite the nauseatingly common parroting by corporate press releases of a “match made in heaven”… this could be one of those times.


Marketing strategy: The key differentiator of BWX to other branded PC products is its marketing spend. While maintaining similar or lower gross margins, the reason for industry leading EBITDA margins is due to its spend on sales and marketing of 10% of sales comparing favourably to international competitors at 25 – 30%. This competitive advantage is derived from the word of mouth endorsement of Sukin by women who love the product, which has and always will be the best form of marketing out there. BWX choose to utilise digital media and influencers to promote their brand rather than traditional media, a far more effective return on investment due to the increased likelihood of a young woman trying out a new product recommended by a blogger they follow. Bloggers are more likely to be perceived as a trusted source compared to just another billboard or commercial. Beauty bloggers are all powerful in this space as lead influencers, and if you want proof ask any young woman what beauty blogs they read and you will soon unearth a whole new side of the internet. Blogs upon blogs with high traffic, devoted to discussing Napoleon Perdis vs. MAC (pretend like you know) as a much more worthy match-up than Mayweather vs. McGregor. Another valuable bit of market research is to google “Sukin blog review” and read some of the bloggers reviews of the products, or give their Instagram page a visit to see the engagement they nurture with their core demographic. A far more valuable feedback tool for consumer investing than sell-side research.

Blue = “Sukin”; Red = “Mineral Fusion”

Interesting trend in search queries – 100% growth of interest for both Sukin and Mineral Fusion over the past 3 years


Capital light growth: Even though it is vertically integrated, BWX should be able to support further growth as it has in the past with minimal capex (1 – 2% of sales)

Management: The management team and board have extensive FMCG experience and have been around the company for a long time overseeing substantial growth thus far. Moving forward this group who have to date made all the right moves are incentivised to keep growing the brand since key senior personnel have the majority of their net worth derived from paper fortunes in BWX stock (CEO John Humble holds 10% of shares outstanding)


Customer concentration: A concerning characteristic of the Australian pharmaceutical market is the relative concentration of a few key players such as Priceline, Terry White, and Chemist Warehouse. BWX derived 50% of its FY16 sales from three customers and it is plausible that these customers may attempt to exercise market power to squeeze BWX margins or demand volume based promotional discounting as Sukin grows. This however seems unlikely while the Sukin brand remains attractive and customer loyalty is high

Competition: Currently competing with MNC and other nature focused company sub brands such as Nivea, Olay, Jurlique, Trilogy, Natio, Burts Bees. The revolution of natural products has not gone unnoticed as FMCG majors will increasingly seek to enter and dominate the sector, not ceding share to smaller names. As such, it is likely competition will increase in the “masstige” segment of the market. A natural mitigating factor to this is the personal importance of skin care to most women and the high customer retention rates once a product is established as a part of a skincare regime

Execution: The downside for BWX is that overseas consumers tastes deviate from Australian consumers and overseas growth does not pan out. Under such a scenario, domestic sales are likely to hit a ceiling over the medium term and the multiple is likely to de-rate as it could go ex-growth

Brand deterioration: While highly unlikely, a scandal attached to the Sukin brand that adversely affects its natural image or results in a recall would be a disaster for the company. Bloggers may also take a negative view of the brand as Sukin is currently not “organic certified” which some posts online have already noted

Poor execution: This risk is particularly relevant within the Chinese market. It is uncertain what proportion of domestic sales are derived from informal “diagou” sales channels, however estimates have put it at 10 – 15%. The risk of entering China too quickly via e-commerce channels may be that diagou margins are compressed and the diagou promote other Australian skin care brands over Sukin to their Chinese clientele. Another risk to the Chinese market is regulatory changes that are currently delayed indefinitely by the government are introduced whereby Sukin will be effectively locked out of direct sales into China due to requirements for products to be animal tested

Brand building expenses: New markets take increased discounting to grow distribution and higher brand building costs, compressing margins


In terms of valuation, on first glance at the share price chart it feels as though we have missed the boat on BWX due to the stunning run up in price since the $1.50 (!!!) issuance in November 2015. This is due to the company soundly beating its prospectus forecast through outperformance of Sukin. Share price has continued to appreciate due to a raft of earnings upgrades and improving analyst commentary, but as we consider the investment today is there significant upside to the lofty ambitions the market has given the company credit for already?

Based on management guidance and consensus estimates (Annual results are due in a few weeks) on a trailing basis for FY17, BWX trades at c. 22x EV/EBITDA (assuming $50m of acquisition debt related to MF) and at 31x P/E. While the pricing on face value seems stretched and beyond the grasp of a traditional value investor, this fails to recognise the obvious growth potential and momentum of the business. On a forward basis utilising FY18 consensus, BWX trades at c. 15x EV/NTM EBITDA and 23x P/E NTM. The upside from these levels is significant as the growth levers attached to geographic expansion, exposure to underlying consumer trend shift to natural products, operating leverage and cross selling between Mineral Fusion and Sukin means earnings can continue to grow substantially off a relatively low basis for many years to come.

Traditionally, due to the mature nature and similar capital structure of many FMCG businesses most stocks within the sector trade on a P/E basis, with multiple premium reliant upon profitability and growth trajectory. Looking at the valuations of a PC peerset (JNJ; PG; OR; ULVR; CL; EL; BEI) shows trading levels of 20 – 28x forward P/E for lower growth than BWX (albeit all these conglomerates hold a much higher quality stable of diversified brands). Increasingly stretched valuations over the past few years in a post-QE world may be inflating this but considering comparables we can expect BWX to trade at an EPS multiple in the future of 20x given the higher growth profile. From a cash flow perspective, the FCF yield on the business may seem weak over the near term however; cash conversion from EBITDA to FCF is not reduced due to capex but rather NWC investment to support growth. Upside from buying at these levels is clear when you consider the very real possibility of EPS growing threefold from current levels.


Buy. Expensive at $5.65, but cheap when considering the growth opportunity for BWX. While expansion carries risk, the reward on offer gives us confidence to be a buyer at current levels. Will likely require patience as a multi-year expansion plays out and there will be bumps along the way.

Disclosure: I am long BWX (ASX: BWX)