Criteo’s profitability continues despite its business model (NASDAQ: CRTO)

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French advertising agency Criteo SA (NASDAQ: CRTO) has been a market laggard since it went public in 2013. Despite a history of profitable growth. Questions about business resilience sent shares lower.exist To answer these questions, management has been working since 2018 to transform the company into a more resilient, diverse business. Given management’s success to date, the company will likely be able to maintain its profitability with a more resilient business model. After a four-year turnaround, the company looks stronger and its free cash flow (FCF) is at very attractive levels.

Criteo has been a market laggard

Investors in Criteo have earned a total shareholder return of -23% since the company went public in 2013.

Source: Criteo SA

Source: Criteo SA

In short, the company has been a poor investment.

strong financial performance

Criteo’s revenue has grown from nearly $272 million in 2012 to more than $2.25 billion in 2021, a 10-year revenue compound annual growth rate (CAGR) of 23.56%. According to Credit Suisse’s base rate playbook, only 2% of companies achieved such huge returns between 1950 and 2015. Revenue for the trailing 12-month (TTM) period was nearly $2.17 billion.

Source: Credit Suisse

Source: Credit Suisse

Although gross profit margins fell from 0.74 in 2012 to 0.34 in 2021, they are still above the 0.33 threshold that Robert Novi-Marx considers attractive. During the TTM period, gross margin rose to 0.42.

Criteo’s operating margin increased from 3.3% in 2012 to 6.7% in 2021, falling to 3.2% during the TTM.

The company’s net income grew from $0.98 million in 2012 to nearly $134.5 million in 2021, representing a 10-year net income CAGR of 63.58%. According to the Base Rate Book, only 0.1% of companies achieved similar growth rates during the period 1950-2015.

Source: Credit Suisse

Source: Credit Suisse

During the TTM period, net income has grown to over $84 million.

Criteo’s FCF surged from -$1.76 million in 2012 to nearly $166 million in 2021. During the TTM, the FCF was $146 million.

The company’s competitive position, marked by declining gross profit, is further evidenced by its high but declining return on invested capital (ROIC). ROI started at 13.9% in 2013, soared to nearly 149% in 2014, and declined steadily since then, reaching 31% in 2021 and 14.9% during the TTM period.

Source: Author calculations, Criteo Annual Report

Source: Author calculations, Criteo Annual Report

As a growth stock, Criteo’s assets have grown rapidly, from over $137 million in 2012 to nearly $1.99 billion in 2021, with a 10-year asset compound annual growth rate of 30.63%. There is an inverse relationship between asset growth and future returns, known in the academic literature as the asset growth effect. The risk of misallocation of funds and market oversupply contributes to this inverse relationship. So, interestingly, the company’s assets declined during the TTM to just over $1.87 billion, while the company’s profitability improved.

Incorporate resilience into Criteo

Criteo’s poor market performance reflects the challenges it faces as a digital advertising company. The business model is fairly standard: the company displays interactive banner ads based on individual browsing preferences and behavior. Criteo pays per click/cost per click (CPC).

Digital transformation has disrupted the advertising business, with advertising moving from print, television and radio to digital media. However, advertising is subject to network effects, making the industry a winner-take-all outcome, and Alphabet Inc. (GOOGL) and Meta Platforms, Inc. (META) have been the big winners. So while the company is clearly well-run and able to generate strong financial results, there are significant questions about whether it will be a winner in the market.

Criteo couldn’t build the kind of resilient business model that digital advertising makes possible.

Apple’s (AAPL) introduction of the Intelligent Tracking Prevention (ITP) feature in Safari 11 in 2017 cost the company $25 million in lost revenue. In response, the company redesigned its platform architecture, and revenue fell just 1% in 2018. Criteo is also influenced by the perception that the European Union (EU) General Data Protection Regulation (GDPR) can harm it.

The company’s woes reflect the importance of Apple, Alphabet, Meta, Amazon (AMZN) in the market for digital advertising solutions. Criteo has a distinct disadvantage compared to these companies, as they can leverage the data collected from their platforms and use those platforms to achieve economies of scale that Criteo cannot. These businesses are larger, have better resources, and are able to compete on price. The companies also offer self-service options that users of their platforms can use to promote their brands. For Criteo, this is far more serious than competition from true peers, which cannot drive or disrupt markets the way big tech companies can. Companies such as Adobe (ADBE), Oracle (ORCL) and Salesforce Inc are also at risk. (CRM) creation tools that allow them to create their own internal campaigns.

Company founder Jean-Baptiste Rudelle returned as CEO in 2018, in response to larger existential issues overshadowed by the company’s financial performance. Since then, the company has been working on the transition to the multi-product platform Criteo Commerce media platform, trying to build resiliency into the company’s business model. Megan Clarken has been CEO since late 2019 and continues to execute the company’s long-term transformation plan.

Source: 2021 Annual Report

Source: 2021 Annual Report

Despite the many problems with its business model, the company has been able to grow profitably. This reflects the quality of the business, which is able to take advantage of significant and still-present tailwinds in digital advertising:

  • Despite a return to pre-pandemic trend lines, e-commerce remained a strong driver of growth.

  • First-party data suggests it can provide meaningful value creation, with, Inc., Walmart Inc. (WMT) and Walgreens Boots Alliance, Inc. (WBA) showing strong ad revenue growth.

  • The State of the Retail Media Industry in EMEA study commissioned by Criteo found that 92% of brand advertisers believe they rely on retail media for growth.

  • 34% of retailers believe their success will depend on their ability to form meaningful partnerships with ad tech and media companies.

Criteo’s success to date shows that a long-term transformation plan will lead to a profitable and more resilient business.


The company’s price-to-earnings (PE) ratio is 21.12, compared to the 5-year average of 18.46. The S&P 500 has a price-to-earnings ratio of 18.99. Criteo seems to be overrated. But in terms of its FCF yield (FCF/enterprise value), the company’s FCF yield is closer to 12.3%. This is definitely more attractive than the FCF yield of the 2,000 largest US-listed companies, which New Constructs calculates at 1.5%. As such, Criteo’s fast-growing FCF trades at a more attractive valuation than the market’s FCF.

in conclusion

Since going public, Criteo has significantly underperformed the market. Despite the proven ability to improve profitability. However, given the nature of digital advertising, questions about the company’s business model led to its underperformance. The company has been steadily changing its business model, and given that it has been profitable so far, its more resilient business model should make Criteo a more attractive investment. Additionally, the company’s fast-growing free cash flow is trading well above market levels.

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