Criteo's Dependence on Retargeting Is Lessening Further

Senior Equity Analyst

Ali Mogharabi

On the back of the growing digital ad market, Criteo stood out among many ad-tech companies in 2023 as it added clients, increased its top line, and expanded margins to remain profitable and cash flow positive. However, limitations brought forth by Apple’s Intelligent Tracking Prevention, or ITP, and its removal of Identifiers for Advertisers, or IDFA, and Google’s plan to abandon third-party cookies in 2024 adversely affected Criteo’s ability to capture additional user data, in turn weighing on the firm’s machine-learning capabilities, ad purchase and placement, and client growth. For this reason, we view Criteo as a no-moat company.

With platforms that attract both retailers ad buyers and sellers, we think Criteo is well positioned to benefit from the growing global retail media digital ad market. Criteo manages the ad supply for various retailers and applies first-party customer data to make those inventories more attractive to advertisers. While the value of retargeting, which still represents nearly 50% of net revenue, has diminished due to the diminishing value of third-party cookies, we think Criteo's relationship with many retailers and its offering to both sell their ad inventories and also implement their omnichannel marketing strategies positions the firm to benefit from growth in retail media ad spending.

While the decisions by Apple and Google have continued to pressure top-line growth, the firm remains profitable We think net revenue growth acceleration driven by further adoption of its platform by publishers and advertisers, in addition to acquisitions like that of the supply-side platform provider Iponweb in 2022, will expand Criteo’s margins through 2028.

Business Strategy & Outlook

While Criteo still benefits from network effects and intangible assets consisting of machine learning technology and collection of user behavior and product data, we do not believe such economic moat factors are maintainable. Limitations brought forth by Apple’s Intelligent Tracking Prevention, or ITP, and its removal of Identifiers for Advertisers, or IDFA, and Google’s plan to abandon third-party cookies in 2024 adversely affect Criteo’s ability to capture additional user data, in turn weighing on the firm’s machine-learning capabilities, ad purchase and placement, and client growth. For these reasons, we believe it is not likely that the firm will generate excess return on capital over the next 10 years. 

We believe that user behavior data was the key to Criteo's success, and an inability to collect data can disrupt the digital ad sale and purchase process. With less data, Criteo is less effective in calculating the probability that a user will engage with an ad. In turn, advertisers may see a lower ROI on such ads and, similarly, may run fewer ads through Criteo in the future.

Prior to moves by Apple and Google, Criteo’s platform had created a heterogenous network effect due to the positive virtuous cycle and incremental value it created for advertisers and publishers as the platform gained scale. As its clients’ ads drove more revenue for the client (say, online clothing sales at Macy’s), more clients jumped on board. In turn, Criteo’s offering was more attractive to publishers, which resulted in improved access to inventory and data, which then drove more sales and ROI for clients. Higher ROI drove higher client spending and attracted more publishers, providing Criteo with more access to inventory, which allowed the company to deliver more ads. With more ads, Criteo gathered more data which the firm utilized to make its ads more effective, creating value for clients and helping to bring in more clients and campaigns. Such network effect dissipated mainly due to heightened uncertainty about the firm’s access to user behavior data.

None

Economic Moat

Criteo

Criteo SA is a global technology company, which specializes in digital performance marketing. The firm enables e-commerce companies to leverage large volumes of granular data to engage and convert their customers. It operates through the following segments: Marketing Solutions and Retail Media. The Marketing Solutions segment allows commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments. The Retail Media segment allows retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals. The company was founded by Jean-Baptiste Rudelle, Franck Le Ouay, Pascal Gauthier, Laurent Quatrefages and Romain Niccoli on November 3, 2005 and is headquartered in Paris, France.

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Criteo reports strong Q1 earnings, focuses on Retail Media growth

Criteo's Q1 2023 performance showcased strong revenue and growth in Retail Media and Commerce Audiences, while facing challenges in Retargeting and cautious outlooks due to macroeconomic volatility. The company's key wins, strategic partnerships, and focus on innovative products like Commerce Max present opportunities for future growth and market leadership.

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Criteo delivered a strong Q3, but anticipates caution for Q4 due to a soft October and a shorter holiday season. The company aims to outpace the market on media spend in 2024, despite macroeconomic challenges and uncertainty from the Privacy Sandbox impact. Criteo's transformation to a multi-solution platform and the launch of Commerce Max present opportunities for growth, while challenges lie in the shift in the Retail Media pricing model and cautious outlook for the holiday season.

Criteo achieves record revenue in 2023, prepares for cookie deprecation

Criteo delivered strong financial results for 2023, driven by record top-line performance and robust growth in retail media and marketing solutions. The company is preparing for the deprecation of third-party cookies on Chrome and expects mid-single digit year-over-year growth in 2024. Despite challenges in the evolving digital advertising landscape, Criteo is well-positioned to capitalize on opportunities and drive sustainable, profitable growth.

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