Criteo S.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Criteo S.A. is a global technology company that enables brands and media owners to drive better commerce outcomes through the world’s leading Commerce Media Platform.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Criteo operates a Commerce Media Platform that acts as a bridge between brands, retailers, and media owners. The core idea is to enable marketers to reach and influence consumers along their shopping journey through data, targeting, and ad placement. The company uses its proprietary data assets, algorithms and technologies, which are also offered to large commerce companies. Essentially, Criteo specializes in providing advertising and monetization solutions for e-commerce businesses.

  • Revenue Distribution: Criteo’s revenue is divided into two segments:
    • Retail Media: This segment helps brands, retailers, and agencies to reach consumers across their shopping journey by leveraging data and ad placements.
    • Performance Media: This segment involves commerce activation, monetization, and services, including data monetization.
  • Industry Trends: The advertising industry is constantly evolving, particularly in the digital realm. Some relevant trends to keep in mind for Criteo:
    • Increased focus on data privacy: This is leading to new regulations that impact data collection and usage, forcing companies to adapt to new data privacy restrictions. Criteo has also developed its own systems to handle this.
    • Growing importance of retail media: Retail media has grown exponentially, with brands increasingly recognizing the value of advertising within retailers’ digital assets.
    • Artificial Intelligence/Machine Learning: The need for efficient and targeted ad delivery requires advanced AI and ML technologies. Criteo continues to implement and utilize their AI models to generate value for its customers.
  • Competitive Landscape: The digital advertising landscape is extremely competitive. Some of Criteo’s key competitors include:
    • Large technology platforms: Companies like Google, Meta, Amazon, and Apple compete with Criteo using their own large advertising platforms and networks.
    • Specialized advertising platforms: Many smaller companies are focusing on niche parts of the market, including other retargeting or media optimization companies.
    • Large agency holding companies: Holding companies have their own agency media buying platforms and tools, competing with Criteo in serving brands and media owners.
  • What Makes the Company Different: Here are some key differentiators of Criteo:
    • Proprietary Data Assets: Criteo uses a very large amount of data to enhance its advertising solutions, which sets it apart from competitors.
    • Advanced AI and ML: The company utilizes advanced AI algorithms for their technology platform to optimize ad placement, targeting, and conversion rates.
    • Focus on Commerce Media: Criteo’s core offering is their Commerce Media Platform, which has a strong focus on measurable outcomes for ecommerce advertisers.
    • Privacy-Focused Approach: Criteo continues to incorporate new and evolving regulations, making sure its offerings continue to remain compliant with data privacy regulations.

Financials

Criteo’s financials, like the tech space, are complex and require further investigation, however, a general overview can give some great insights:

  • Revenue Analysis: Revenue from Retail Media has been consistently increasing since the acquisition of IPONWEB in 2021, while the company is actively working towards increasing the revenue from its Performance Media solution. The majority of revenue comes from the Americas region, followed by Europe and then Asia, but there are notable differences in growth rates. For example, growth is stronger in EMEA and Asia-Pacific region than in America.

The data for September 2022 is higher than September 2023 because of the huge increase in Retail Media as a result of IPONWEB acquisition. They are still integrating this.

  • Profitability: Gross profit has been in decline in the past year, which is a result of a lower margin product mix, which is a huge focus of management to improve upon with the continued focus on their Retail Media segment. The company’s operating expenses are a major concern because they represent a huge portion of revenue. The company has been focusing on reducing its operational expenses as they are still in the process of integration.

  • Cash Flows: Criteo’s operations generate positive cash flow, even though the company’s profit may be low. They have been re-investing into their business through both equipment and acquisitions. In the short-term their free cash flow is low but in the long-term, management is looking to have a large positive free cash flow.

The company’s ability to consistently generate cash provides a clear pathway to paying down debt and continuing investment into its business.

  • Balance Sheet: Criteo has a reasonably healthy balance sheet, a lot of cash on hand, and their debt is decreasing with time, while also the company is re-investing profits into its business. All assets are properly listed with corresponding liabilities. In short, the company seems to be in good financial health at the moment.

  • Recent Concerns: A major concern with the company is that, although they do generate revenue, the profit margin is rather low, making them susceptible to economic downturns. The company’s management has been focusing on restructuring for efficiency and cutting costs to improve profitability. They mentioned the recent weakness in marketing spending affecting the whole industry is expected to rebound soon. The management also mentioned, that there is still a high amount of uncertainity with the changing macroeconomic environment and further restructuring may be required in the future.

The company is in a major transition mode, and they are actively trying to increase their operational efficiency. The results of these restructuring efforts are yet to be seen.

Moat Assessment

Criteo’s moat is not well-defined, and they do not have a clear economic moat.

  • Intangible Assets: Criteo leverages its brand and its data, however, there are not many factors to keep competitors from using the same strategies. It seems that they are not doing anything unique, and therefore do not have an intangible asset moat.

  • Switching Costs: The company’s services are readily available and companies can switch to other service providers or try to do in-house, therefore there are low switching costs.

  • Network Effects: There are some small network effects present in Criteo’s offerings, but not enough to provide it a strong moat. A lot of advertisers choose specific platforms and ad networks instead of focusing only on one specific provider, thereby diminishing the network effect.

  • Cost Advantages: Criteo seems to operate with higher costs than its competitors, so it does not have a cost advantage.

Based on the above, Criteo’s moat score is 2 out of 5. Their moat is not strong, but they do have some aspects of sustainable competitive advantage.

Risks

Here are some risks that can affect Criteo:

  • Data Privacy Regulations: Changes in global data privacy laws could greatly affect Criteo’s ability to collect and leverage consumer data for its advertising solutions.
  • Competition: Intense competition from large tech companies can make it hard for Criteo to grow and take market share.
  • Dependence on Large Platforms: Criteo depends on some key large platforms like Google, Apple, and Facebook for much of its ad sales. Changes to the rules or policies of these platforms could negatively affect their business.
  • Declining Profitability: The company’s margins may continue to be under pressure, if they are not successful in decreasing operational expenses and increasing revenues from their more profitable segments like the Retail Media.

Understandability

Criteo’s business model is fairly complex for the average person. On the one hand, it is a technological company operating an ad platform, on the other hand, it is a technology partner for retailers. A detailed understanding of the company needs an intimate understanding of the technology aspect, as well as the marketing environment. On the whole, the business model can be comprehended, though the details are not that easy to understand. Based on the above, the company is given an understandability rating of 3 out of 5.

Balance Sheet Health

Criteo’s balance sheet is reasonably healthy. The company has low debt and a decent amount of cash. They are actively re-investing cash in the business to grow. Based on the above, the balance sheet health is given a score of 4 out of 5.