Galeanu Mihai Digital marketing player Criteo S.A. (NASDAQ:CRTO) reports massive clients and impressive revenue expectations. In my view, successful integration of IPONWEB, further growth momentum coming from organic growth, and more scaling partnerships will likely serve as drivers for revenue growth and FCF. I do see risk from large tech companies and new emerging marketing agencies, however I believe that the current stock price is significantly lower than CRTO’s fair price. Criteo Works With Massive Corporations, And Reports Impressive Expectations Criteo offers digital marketing services through data processing and segmentation by using artificial intelligence. The company currently offers its services to the whole world with its digital stores. These services are aimed at positioning brands in the media industry with its various variants. Since 2018, accelerated by the pandemic and the year 2020, Criteo has diversified its offer from a single product available to a business model that includes planning, advice, management, and distribution of content tailored to the needs of its clients. The model is sustained in a direct relationship with its clients, which include emerging companies such as companies historically positioned in the markets, which give permission to Criteo to collect data from their platforms and applications, to have the information of use of its clients, consequently generating highly segmented communication and marketing channels. Considering that large brands and retailers work with Criteo, I believe that it is a great moment to review the company’s business expectations. Source: Fact Sheet It is also worth noting that Criteo appears to be targeting a massive market opportunity, which was said to be close to $2 trillion in ecommerce sales. Let’s keep in mind that we are talking about a business that expects to make a significant amount of dollars from commerce media and retail media, which represent many billions in total advertising spend opportunity. Source: Investor Presentation From November, 2022 With the previous information, investors will likely understand the company’s revenue expectations. Criteo expects to deliver sales growth close to 15% CAGR from 2021 to 2025, an adjusted EBITDA from 28%-32%, and FCF/Adjusted EBITDA close to 45%. I believe that the numbers are quite impressive. Source: Fact Sheet Criteo’s Balance Sheet Stands In Good Shape As of September 30, 2022, the company reported cash worth $307.323 million, trade receivables close to $576.082 million, and income taxes of $16.474 million along with other taxes of $75.795 million. With other current assets worth $34.347 million and marketable securities of $10 million, total current assets are equal to $1.045 billion, more than 1x the total amount of liabilities. I don’t really see any liquidity risk from Criteo. Property stood at $114.493 million with intangible assets worth $77.464 million, goodwill of $597.781 million, and right of use assets of $101.982 million. Other non-current assets stood at close to $54.478 million with deferred tax assets of $49.487 million, total non-current assets of $1.077 billion, and total assets worth $2.12 billion. The asset/liability ratio stands at close to 2x, so I would say that Criteo’s balance sheet stands in good shape. Source: 10-Q Criteo reported trade payables worth $576.762 million, including contingencies of $60.038 million and lease liabilities worth $30.469 million. Other tax liabilities were $56.894 million with liabilities with employees of $72.897 million in addition to other current liabilities of $60.810 million. Finally, total current liabilities stood at close to $863.472 million. With non-current lease liabilities of $77.9 million, non-current contingencies portion of $32.7 million, and other non-current liabilities of $65.618 million, total non-current liabilities stood at $182.19 million. Finally, total liabilities are equal to $1.045 billion. Considering future expected EBITDA, I wouldn’t expect the total amount of debt to represent an issue for Criteo. Source: 10-Q More CexT Growth Momentum And Better Technologies It is worth noting that Criteo charges its fees based on the success of its marketing strategy, receiving payments per click and per subscription, or payments for specific operations within the platforms of its clients. The company was established with the purpose of transforming websites into digital stores, and has grown to be able to offer a complete service in this regard. I would expect that customer growth will grow as more website owners and CEOs learn about Criteo’s price strategies. Considering recent information about the expectations of management for 2023, I am quite optimistic about Criteo. In my view, if CexT growth momentum continues driven by IPONWEB and 2023 Adjusted EBITDA margin grows thanks to 2022 organic investments, FCF will likely trend north. Source: Investor Presentation From November, 2022 Among the key drivers given by Criteo, I would expect that scaling partnerships, R&D, and digital transformation from 2023 will likely drive revenue growth north. The list of key drivers offered by Criteo is given below. Source: Investor Presentation From November, 2022 In a growing industry such as digital commerce, where having access to user information through first-hand channels is a great differential over third-party cookies, and more and more companies depend on technology and artificial intelligence for this area to generate their advertising, in my view, Criteo is well positioned for the future. Under this scenario, I assumed that strengthening its operations accompanied by using first-line technologies for providing data and processing this information will likely drive the company’s revenue north. I tried to be very conservative. I foresee that by 2032 we will have net sales of $1.491 billion, a net sales growth of 3.72%, an EBITDA close to $434 million, and an EBITDA margin of 29.10%. On the other hand, the FCF will be $219 million with the FCF margin of $14.70%. The net PV of FCF would be $1.193 billion. Source: Internal Estimates The EV/EBITDA will be around 6.5x with a terminal value of $2.820 billion. The NPV of TV will be $1.236 billion, along with an enterprise value of $2.429 billion and cash of $307 million. The debt will be around $82 million accompanied by an equity of $2.654 billion, shares of 58 million, and a fair price of $46. Source: Internal Estimates Criteo’s own outlook is at a 15% revenue CAGR. If we use sales growth close to 15%, the implied valuation would be $82 per share. In any case, Criteo looks quite undervalued. Source: Internal Estimates Source: Internal Estimates The current stock price is significantly lower than the fair price obtained from my discounted cash flow model. In my view, further stock repurchases announced recently will likely enhance the company’s valuation. At least, we will likely see an increase in the demand for the stock driven by the share buyback program. Source: Investor Presentation From November, 2022 Large Competitors, M&A Integration Failure, And Client Concentration In Some Regions Represent Risks For Criteo Criteo’s services are closely linked to the current evolution and transformation towards the digital sphere, positioning it to compete with companies with much greater infrastructure and expansion capacity such as Amazon (AMZN) and Meta from Facebook (META) as well as Google (GOOG) or Microsoft (MSFT). These competing companies cover the entire market and products in which Criteo has positions. In addition, we can add the potential evolution towards this type of services from other large companies such as Adobe (ADBE) and Oracle (ORCL), or also take into account Apple’s development of new devices and applications. In other words, Criteo has competition with large technology companies, which are not only the largest in their operations, but in many cases develop products that open new paths within the industry. Besides, although its clients are diversified and 10 of the largest clients account for close to 16% of the company’s revenue, operations in some regions show client concentration risks. These risks, together with the dependence of some areas of its business on intermediary agencies, as well as the growth of new marketing agencies, represent other risks for Criteo. In my view, an error in the prediction of trends could seriously affect relationships with customers. Understanding the high degree of competitiveness of the industry, any disadvantage can mean a pronounced distancing from competing companies: Our industry and business are subject to rapid and frequent changes in technology, evolving client needs and the frequent introduction by our competitors of new and enhanced offerings. Our future success will depend on our ability to continuously enhance and improve our offerings to meet client needs, build our brand, scale our technology capabilities, add functionality to and improve the performance of the Criteo Commerce Media Platform, and address technological and industry advancements. If we are unable to enhance our solutions to meet market demand in a timely manner, we may not be able to maintain our existing clients or attract new clients, and our solutions may become less competitive or obsolete. Source: 10-k On the other hand, Criteo is still integrating its new acquisitions including that of IPONWEB. M&A failures could lower future expected synergies or expected revenue growth, which could bring down the company’s operating margin and free cash flow. Conclusion Criteo works with massive corporations, reports an impressive target market, and expects to grow at double digit until 2024-2025. In my view, under successful integration of IPONWEB, further CexT growth momentum, and new scaling partnerships, Criteo will likely experience free cash flow generation. Even taking into account risks from large tech competitors, new marketing agencies, or failed prediction of digital trends, I believe that Criteo is undervalued at its current market price.
