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Cardlytics Stock is a Winner, but Beware Valuation Risks

Luke Lango

One technology stock that deserves your attention, given its explosive gains over the past year and its huge potential in the long run, is Cardlytics (NASDAQ:CDLX) stock. At its core, this is a payment card analytics company, which leverages credit and debit card data to pair marketers with consumers and power relevant and strong bank loyalty and rewards programs.

Cardlytics Stock is a Winner, but Beware Valuation Risks
Cardlytics Stock is a Winner, but Beware Valuation Risks

This business model is taking off. When Cardlytics hit the public markets back in early 2018, the company had only partnered with one major bank, Bank of America (NYSE:BAC), and had just 50 million active users. Today, Cardlytics has partnerships with JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC), too, and is approaching 150 million monthly active users, meaning that Cardlytics now has purchase data on essentially one out of every two card swipes in the U.S.

That’s a lot of data. And there’s a lot of value in that data. As such, it should not be surprise that as Cardlytics has grown from 50 million users at its IPO to nearly 150 million users today, CDLX stock has roared from a $13 IPO price, to a $87 price tag — while $90 earlier — today.

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But, on the heels of such an enormous rally over the past two years, does CDLX stock have any more upside left?

In the near-term, probably not. The valuation seems maxed out. But, in the long run, yes. Cardlytics is in the early stages of a huge multi-year growth narrative. Over the next few years, as this growth narrative plays out, CDLX stock will only go higher.

Tons of Data From Billions of Swipes

Cardlytics stock has all the attributes of a long-term winner.

The core of the Cardlytics business model is all about unlocking value in the vast world of credit and debit card purchase data. That is, banks around the globe have collectively issued billions of payment cards, and those billions of payment cards are used several times each year. Consequently, in any given year, banks are collectively producing billions upon billions of consumer purchase data points.

So, Cardlytics created a platform aimed at tapping into that enormous payment card database. Their angle? Loyalty and rewards programs.

The process is simple. Partner with banks. Gain access to all that data. Use that data to work with marketers to create highly personalized and tailored loyalty and rewards programs for the banks. Banks get increased customer spending. Marketers get increased product awareness and sales. Cardlytics gets a fee for setting it all up.

Sounds genius to me. It’s also sustainable, because in data businesses, scale matters. The bigger Cardlytics gets, the more data it has, and the better loyalty programs it can build. So, as more and more banks migrate to this data-driven loyalty program model, they will trust the biggest player, Cardlytics, to do the best job.

Further, Cardlytics is primed for big growth because they only have 150 million monthly active users, and there are over a billion payment cards in the world. Even further, this is a relatively high-margin business with a lot of fixed costs, so sustained big revenue and user growth will inevitably drive positive operating leverage and result in huge profits.

Cardlytics Stock is Maxed Out

Although CDLX stock is a long term winner, a lot of that long term winning has already been done in the past year, with shares up 400% over that stretch. Going forward, near term upside in CDLX stock may be relatively muted by valuation friction.

As is obvious, I’m bullish on Cardlytics’ long-term growth prospects. My long-term model on the company reflects this bullishness. I assume that the company can sustain robust double-digit user growth for the next several years, thanks to increased U.S. penetration and some international expansion. I further assume that average revenue per user will trend higher, too, and that revenue growth will remain steadily north of 20% for the next few years.

Other critical assumptions include relatively slow expense growth in the 10% to 15% per year range, sustained margin expansion, and significant profitability ramp into 2025.

But, even under all those bullish assumptions, I still have a hard time justifying the CDLX stock price today.

My long-term model pegs Cardlytics’ earnings per share at $3.50 by 2025. Based on an 35x forward earnings multiple — which is a medium-term average for application software stocks — and a 10% annual discount rate, that implies a 2020 price target for CDLX stock of about $85.

That’s roughly where shares trade hands today. So, relative to the company’s long-term profit growth prospects, Cardlytics stock is fully valued in the near term.

Smart Company, Doing Smart Things

I like Cardlytics. This is a smart company, doing smart things, with a ton of growth momentum, a long runway ahead to sustain that momentum, and a favorable financial profile that lends itself to robust long term profit growth potential. For all intents and purposes, CDLX stock is a long-term winner.

But, shares have come very far, very fast, and appear fully valued in the near term. So, it’s probably best not to chase this rally. Instead, wait for the stock to cool off. Wait for the inevitable hiccup and dip. Then, buy that dip.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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