EUR 850.00 For Business Accounts Only

Morningstar | Impact of Facebook News on Criteo Revenue Likely to be Minimal; Shares Have Become More Attractive

Criteo shares are down 11% after an article published in France on Sept. 6 indicated that the firm is no longer on Facebook’s Marketing Partner list. In our view, the market is currently overreacting to this news creating an attractive opportunity for investors with high risk tolerance to invest in this no-moat and very high uncertainty name. The stock is now trading at a 35% discount to our $35 per share fair value estimate.

We believe such reaction to the Facebook news is unwarranted for a few reasons. First, while Criteo is no longer a preferred marketing partner of Facebook and will not be able to test new features on the Facebook platform, the firm can continue to purchase ad inventory from Facebook. Second, Criteo’s revenue dependency on Facebook ad inventory has been declining gradually during the last three years. According to Criteo, only around 4% of its revenue ex-TAC in the second quarter 2018 was from inventory purchased from Facebook, below the 9% in 2015 and 6% the last two years. And third, Criteo’s guidance provided on the second-quarter call, which was disappointing, had likely considered the possible impact of Facebook’s latest move.

Our view on the company has not changed and we have not made any adjustments to our top- and bottom-line projections for Criteo. We believe that while Criteo is beginning to implement various strategies to broaden its offering, and maintain or increase client retention rates, we think it will take time before the firm recognizes returns on these strategies. Apple’s ITP move is forcing Criteo to invest further in development or purchase of additional products and technology in order not to remain solely dependent on net revenue from retargeting.

In addition, the company is now focusing more on attracting small- and mid-size businesses to its retargeting offering, which likely will be automated, possibly resulting in higher margin revenue. Plus, to make its offerings stickier and maintain its high client retention rate, the firm is also now positioning itself as more of a technology provider for enhancements of product development, marketing, and customer relationship management, rather than just an ad-tech company. To do so, Criteo is likely to increase headcount mainly in engineering and sales during the next 6-12 months. In addition, according to management, the firm will be focusing on helping retailers more effectively monetize their online properties by selling more ad inventories to brands and other advertisers, from which Criteo can generate additional ad revenue.

While we are confident that demand for online advertising will remain strong during the next five years, we are cautious regarding Criteo’s ability to broaden its portfolio of products and effectively cross-sell the various offerings to current or new clients. For this reason, we expect a mere 5% net revenue CAGR for the firm through 2022.

On the margin front, while we expect take rate at normal levels of 41%-42% and anticipate the firm to continue investing in R&D for further product development, we do believe growth in the higher margin and more automated mid-market retargeting along with G&A cost control will create some operating leverage in the next five years. Our projected five-year average operating margin remains at nearly 9%, compared with the firm’s 2017 6%.