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Morningstar | Further Restrictions to Data Tracking May Hit Criteo Once Again; Lowering FVE to $25

We are reducing our fair value estimate of Criteo to $25 per share from $35 as certain steps that may be taken by Alphabet’s Google could hit Criteo’s ad retargeting business. According to an article in AdWeek, in order to address data privacy issues Google may be considering limiting data access to third parties that may include ad-tech firms such as Criteo. In our view, while it is less probable that Google will very aggressively take such path, as advertising represents over 80% of its revenue, we believe the mere possibility of this taking place may impact Criteo clients’ willingness to continue to work with the ad-tech firm. After the stock fell over 28% during the last two days, the upside based on our new fair value estimate may be viewed as attractive; however, we note that this is a no-moat, negative trend, and a very high uncertainty rated name.

The AdWeek article stated that one of the topics currently being discussed at Google is whether or not to put restrictions on third-party data tracking on its Chrome browser which impacts ad retargeting firms like Criteo. According to Criteo, over 50% of its revenue comes from retargeting on desktop or mobile Chrome browsers. Apple first introduced such a strategy in mid-2017, which pushed Criteo revenue growth to flat in 2018 from the 32.5% average during 2015-17. It is less likely that Google will be as aggressive as Apple and its ITP launch. Over 80% of Google’s total revenue is ad revenue. In addition, given the criticism that Google and the other online advertising behemoth, Facebook, face from lawmakers, any strategy that may limit participation of other companies in the growing online ad space faces potential backlash from lawmakers in the U.S. and Europe.

While Criteo and its ad-tech peers await Google's decision, for which no time frame was provided, we believe there are a few reasons why Criteo's revenue along with margins may take a hit going forward. First, in our view, with such news, it is more likely that Criteo's current and potential clients may take a step back before allocating ad dollars to the firm's offerings. We think this will either lower Criteo's 90% client retention rate and/or will significantly lessen the firm's ability to grow its client base.

Second, as the firm's clients begin to ponder more questions, we believe it is more likely that they will bid less aggressively on ad buys via Criteo. Questions that are examined in more detail by Criteo customers include whether or not ROIs on Criteo purchased and placed ads will decline significantly due to possibly a lack of data. Even in a scenario where clients won't abandon Criteo or the firm continues to add new ones, revenue generated per advertisers is likely to decline at a higher rate.

Third, while the firm's latest offerings such as Customer Acquisition and Customer Audience Match are based less on real-time data and more on client's data, to which Criteo has access, possibly the inability to compile more data is more likely to lessen the value of the data the company has at hand, further negatively impacting the value of its services to customers in the future.

Fourth, increasing risks to the firm's net revenue growth will lower Criteo's margins as higher sales and marketing and investments in R&D will be required. In addition, the firm may be forced to acquire more data, which represents additional cost, further impacting margins. Last, we do not expect revenue from the recently acquired Manage to offset any of the issues mentioned above as Manage revenue represents less than 10% of the firm's net revenue.