We believe Gotham’s short thesis on Criteo is highly flawed and misleading. GCR seems to have a tenuous grasp of how internet traffic is distributed and lacks a practical understanding of how the digital advertising industry operates.
• According to industry insiders and clients themselves, the key complaints that GCR levels against Criteo are either baseless or inconsequential. Clients see Criteo as a valued advertising channel.
• These sources also explained that the GCR reports have had no impact, or been largely ignored, by clients.
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We believe the Gotham City Research short thesis on Criteo is highly flawed and misleading.
Criteo is a US-listed company that specializes in digital performance marketing and targeted advertising.1 Criteo’s primary product is dynamic retargeting. For example, if you go to an e-commerce website and browse around but leave without making a purchase, you may see ads on subsequent sites showing you the products you were just looking at in the hopes of driving you back to complete the sale.
GCR has released a series of three reports critical of Criteo over the last few weeks, each increasingly more unhinged in its rhetoric. Yet, the stock is trading higher now than it was prior to the reports.
The muted response by the market is not particularly surprising. Judging by their analysis, we believe GCR has a tenuous grasp of how internet traffic is distributed and lacks a practical understanding of how the digital advertising industry operates.
To believe GCR’s short thesis is to believe that they know more than the sophisticated customers that actually use – and are directly plugged into – Criteo’s service. Criteo has a decade-long operating history and a 90% client retention rate. The idea that there is fraud in the adtech industry, that there are issues with click misattribution, and that somehow Criteo’s clients – most of which are top enterprise retailers – have no idea exactly what’s going on or have not found workaround solutions is next-level patronizing. We can imagine GCR’s thinking as they were writing up their research:
“Check out all this stuff we found on the internet! If we write this up in a report we can finally show all these Fortune 500 companies that use Criteo and constantly monitor their advertising ROI what’s really going on! Short seller with minimal understanding and experience in digital advertising to the rescue!”
The contents of the GCR reports may be news to some investors, but it’s a decades old issue to anyone in the industry. We know this because we called multiple Criteo clients and industry experts to better understand the industry, and learn if there has been any fallout from the GCR reports. Not a single client or industry insider we reached out to actually cared about the reports:
“This has been a topic in the industry for a long time, and so there’s not anything new that’s facing Criteo in that respect. There was that Gotham Research report or whatever that seem to have caught the eye of the analyst community but haven’t really impacted the actual customer base, whatsoever. This isn’t a topic that you hear amongst Criteo customers. A lot of those articles that have come out recently are for people in the industry like ‘well, welcome to 2003’. These are topics that have been at play for a while.”
– Major Criteo competitor
“We’ve seen all this hedge fund activity around Criteo and so we basically wondered if we had missed something. We looked into this and we didn’t find any practices or any fishy things that would lead us to believe that there is a significant amount of fraud behind this business… So, in a nutshell, do I have any reason to believe today and after our own discussions that Criteo is cheating? The answer is no.”
– Major e-commerce client
“Criteo customers aren’t reading these reports [Gotham City Research] that you mentioned in a large way, so the competitive dynamics have nothing to do with click fraud or not syncing with Shopify data.”
– Major Criteo competitor
“No. Not at all. If my costs of sales would increase alarmingly, then we are going to have a conversation, but through years of 30% year-on-year increase in investment into the Criteo channel they’ve performed and really haven’t missed a beat.”
– Fortune 500 client
If anything, the GCR reports almost read like paid advertising for retargeting companies like Criteo, masquerading as a parody of a short thesis. Advertising has always been sort of a pseudo-science. It’s not always easy to determine advertising ROI metrics with any sort of scientific precision, particularly if a company is running multiple advertising channels. But for the most part, there is more accountability and transparency from companies like Criteo which are closer to the end-point of a sale transactions than companies that primarily deal in softer impression advertising.
GCR is correct that there is fraud in the digital advertising industry. No one disputes that. But most of the fraud doesn’t come from ad retargeting where Criteo derives nearly all revenue. It comes from banner advertising and branding. If anything, GCR’s reports show why advertisers are more likely to flock to Criteo and similar companies focused on performance-based metrics.
“There’s kind of two worlds in display ads – there’s brand ads and there’s performance ads. So, brand ads would be like ‘I’m Kellogg’s and I just want to run a bunch of display ads.’ And the metrics that they’re looking at is ‘how many clicks or impressions did I get?’ And for that the fraud actually matters. On the performance side, we’re focused more on output metric so like on e-commerce sites how many times did someone actually purchase our products? The fraud becomes less of an issue because I don’t care if there are fake clicks, because a click is not a metric I look at. I just care about what’s my cost per booking? What’s my ROI? In theory it shouldn’t affect anything because even if I pay for it, it’s still baked into my bidding model.”
– Major online booking company
Let’s consider everything that’s happened since GCR released their reports on Criteo:
• The shares are trading higher now than they were before the reports.
• The GCR reports have had no impact on clients, whatsoever, according to industry interviews.
• The short interest in Criteo has increased and sits near all-time highs16
It seems all that GCR has accomplished is to set Criteo up for a short squeeze. There is nothing in the reports that adequately argues a fundamental change in the business, and no information that is new or revelatory to Criteo’s clients.
In a recent interview with The Drum, GCR sums up their short thesis like this: “In one sentence, our thesis is if clients know what [Criteo’s] doing, it’s game over.”17
Turns out that clients know exactly what Criteo is doing, because they are the ones actually using the system, and monitoring performance with independent third-party verification tools – and they love it.
If Criteo reports no material impact from ITP on the next conference call, as we believe they will, we expect the shares to spike up. Criteo was trading around 11x forward EBITDA prior to the ITP scare in June. Applying the same multiple to 2018 EBITDA gets us US$64 per share. With shares currently trading at US$47.20, this would suggest potential upside of 36%.
See the full report below