Decisive Partnerships And AI Propel Growth Amid Challenges

Key Takeaways

• Enhanced advertising capabilities due to Google's revised cookie policy and partnerships with companies like Microsoft could improve Criteo's revenue and market position.
  
• Focus on AI and deep learning, along with strategic growth in Retail and Performance Media divisions, indicates a strong growth trajectory and potential for increased margins.
  
• Evolving digital ad landscape and regulatory changes could hinder Criteo's growth by affecting ad solution effectiveness and client base retention.

Catalysts

A technology company, provides marketing and monetization services on the open Internet in North and South America, Europe, the Middle East, Africa, and the Asia-Pacific.

• The anticipated smaller impact from Google's decision to not fully deprecate third-party cookies but instead move to a framework supporting user choice suggests Criteo may retain more advertising signal capabilities than previously expected, potentially sustaining or improving its revenue from targeted advertising.
  
• Criteo’s expansion and deepening of its partnership with Microsoft, especially through integration with Microsoft Advertising’s demand and transitioning of on-site retailers onto Criteo’s platform by 2025, is likely to enhance its Retail Media segment's supply and demand, boosting overall revenue and market positioning.
  
• Continued double-digit growth in the Retail Media activated media spend and strategic client additions in both Retail Media and Performance Media divisions suggest a robust growth trajectory, indicating potential for increased revenue and market share.
  
• The company’s focus on AI and deep learning for performance optimization and targeting, in partnership with entities like Microsoft, could enhance Criteo’s ad targeting efficiency and effectiveness, potentially leading to higher margins through improved operational efficiencies and client outcomes.
  
• Criteo’s ongoing commitment to capital return through share buybacks, underlined by the repurchase of $150 million of stock in 2024, is poised to buoy earnings per share (EPS), rendering the stock undervalued for shareholders looking for profitable growth and value return.

Assumptions

• Analysts are assuming Criteo's revenue will decrease by -18.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $155.9 million (and earnings per share of $2.35) by about October 2027, up from $102.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $125.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.0x on those 2027 earnings, up from 22.3x today. This future PE is greater than the current PE for the US Media industry at 14.0x.
• Analysts expect the number of shares outstanding to grow by 5.88% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Risks

• The recent announcement from Google to support third-party cookies with user choice might result in less signal for Criteo than anticipated, potentially impacting the effectiveness and reach of Criteo's retargeting and performance media solutions.
  
• Integration and transition efforts associated with Criteo's expanded partnership with Microsoft could entail unforeseen operational challenges or require additional investments, impacting profitability and operational efficiency.
  
• Despite strong performance with agencies through Commerce Max, the variability in agency workflows and integration with existing DSP relationships could slow down the expected volume of advertising spend from these agencies, affecting revenue growth prospects.
  
• Dependence on the success of new solutions like Commerce Max for sustained growth could risk revenue if the product does not continue to scale or meet market expectations, especially in off-site advertising performance.
  
• The evolving digital advertising landscape and regulatory environment, such as user consent frameworks and alternative ID adoption, could reduce the effectiveness of Criteo's advertising solutions, impacting the company's ability to retain or grow its client base and maintain its margins.

Valuation

• The analysts have a consensus price target of $56.42 for Criteo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $155.9 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 6.7%.
• Given the current share price of $40.62, the analyst's price target of $56.42 is 28.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.