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Is Criteo a Value Play in Digital Advertising?

- By Nicholas Kitonyi

The digital advertising marketplace is composed of a handful of giant players and several small players spread across the supply chain. There are also a few mid-sized companies that have grown over the last few years because of their disruptive products that appeal to clients in a unique way.

But when the subject of digital advertising pops up, most people think of Facebook Inc. (FB), Alphabet Inc. (GOOG)(GOOGL)'s Google and YouTube or the new emerging force in the space, Amazon.com Inc. (AMZN)'s ad services. Even smartphone giant Apple Inc. (AAPL) has taken a leap in recent years with its own search-based advertising network that it seeks to use to bolster its service business.


The digital advertising space is quickly becoming crowded with both the most popular tech giants in the market as well as their significantly smaller counterparts. Therefore, as most investors cherry-pick their preferred stocks from the short list of giants, many more medium-cap and small-cap players will be flying under the radar.

And even more important to note is that the smaller players are mostly pure-play digital advertising companies, which means that they tend to benefit the most when the industry is on a bullish run. Criteo SA (CRTO), the ad-targeting and re-targeting company based in Paris, is a good example of those that could be value plays.

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Criteo is one of the most interesting prospects following its decline from an all-time high (about $54.90) two years ago to a new all-time low (about $20.20) last October. And while the stock has since recouped some of those losses to trade at about $27.00 per share, there is still much room to run as the journey back up continues.

It is good to note though that the company's net income has slowed over the last few quarters. On the other hand, its top-line growth is also beginning to accelerate again after the flat fiscal year 2018.

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The company's annual revenue of about $2.3 billion prices the stock significantly cheaper while its forward price-earnings ratio of about 10.5x compared to the trailing price-earnings ratio of about 20.8x indicates a high expectation on the company's earnings growth in the next 12 months.

Criteo also trades at an incredibly compelling enterprise value-revenue ratio of 0.58, while its price-book value of just 1.96x is also low. However, regardless of the valuation multiples that appear to price the stock cheaply, it is good to note that there is always a reason for any given stock to trade cheaply. As such, this could be a good signal for potential risks that investors are not prepared to pay a hefty premium for. A good example, in this case, is the company's slow top-line growth and the recent decline in net income.

Further, Criteo is battling in a digital advertising sea of giants dominated by Facebook and Alphabet's Google. There are also multiple privately held digital marketing platforms that provide businesses with more customized products that are beginning to attract an audience. Also, as pointed out earlier, Amazon Ad Services, which is the closest parallel to what Criteo does in the advertising space, is now claiming a lion's share of the market. Therefore, there are significant challenges that could hold back Criteo's growth.

Nonetheless, Criteo has made some valuable acquisitions over the years. One of its most recent, the purchase of Storetail, completed in October, fits well into the company's vision for digital advertising. Storetail's highly complementary technology will integrate into Criteo's existing offerings, enriching the Criteo Audience Activation Platform (CAAP).

Criteo wants to focus on multi-product platform marketing, and this seems to be resonating well with its clientele. This could explain the more positive outlook of the company's top-line growth, which is expected to accelerate following last year's flat performance. The top line is expected to hit $2.9 billion within the next three years.

In the company's most recent quarter, it beat analyst estimates on revenue and earnings when it posted revenue of $272 million for the December quarter. The company had guided in October 2018 for revenue between $256 million and $262 million. This sparked the company's stock price rally, which has surged more than 10%. Criteo's stock is now up more than 35% since bottoming at the end of October last year.

In summary, Criteo's stock price plunge in October last year appears to have created a value play opportunity for situational investors. The company has since recovered from the plunge, albeit just barely, which means that there is still some room to run.

Its valuation multiples certainly suggest that the company's stock could be significantly undervalued, but then again, there is always a reason why investors might be reluctant to pay a premium on a company's stock. It would be prudent to assess the potential risks as well, including the recent slowdown in revenue and profits.

Disclosure: I have no positions in the stocks mentioned.

This article first appeared on GuruFocus.