Critero S.A.: Big Brother is Watching You

Deep-Data Integration. Digital Performance Marketing. Individualized Performance Advertising. These are the current corporate terms used to describe ad targeting firm Criteo S.A. (CRTO). Their computer science is the creepy, but useful cyber stalking technology that enables advertisers to bombard you with personalized advertisements wherever you go on the Internet. They do this by dynamically matching your recent Web browsing history via cookies with predictive software algorithms.

For example, shop for laptops on an e-commerce site like Amazon (AMZN), and you'll spend the rest of your browsing session looking at banner ads highlighting Amazon's best available computer wherever you go in cyberspace. The sophisticated technology relies on programmatic buying for relevant consumer options that benefit the advertisers as well. Programmatic advertising is the real time automated bidding, buying and placement of banner ads.

Criteo was incorporated in France in 2005, and began selling their solution primarily to Western European companies two years later. They have since established a global footprint, and can now claim 7,000 clients in Europe, the United States and Asia. As of January 1st, 2015, 88.3% of Criteo's revenues were generated from outside the home country. All financial statistics for the past three years are reported in Euros:

Year	2012	2013	2014
Revenues	€271.9 million	€444.0 million	€745.1 million
Revenues Excluding Traffic Acquisition Costs	€114.1 million	€179 million	€303.7 million
Net Income	€0.8 million	€1.4 million	€35.4 million
Adjusted EBITDA	€17.4 million	€31.3 million	€79.4 million

Business is booming for the small cap company. They're profitable, too. Investor's Business Daily claims Critero's annual earnings growth is projected to be 31% or higher over the next three years. During the last conference call, the company raised full year 2015 guidance for Adjusted EBITDA to between €120 million and €127 million. If we split the difference and use €123.5, it would mean a gain of 55.5% for the year. Wall Street took notice, and the stock continues to rally.

Source: Yahoo! Finance

Addressable Market:

According the the Annual Report:

• Business to consumer retail e-commerce was approximately a $1.3 trillion industry globally in 2014, growing at 19.5% per year from 2013 to 2017, according the eMarketer.
• Goldman Sachs has stated penetration of smartphones and tablets has driven rapid growth of mobile commerce, which represented $61 billion globally in 2012, and is expected to grow at a 53.3% compound annual growth rate between 2012 and 2017.
• ZenithOptimedia reports marketers spent $122.1 billion on Internet advertising in 2014, with this spend expected to grow at a compound annual growth rate of 15.5% through 2017.

Catalysts:

Investor's Business Daily. The newspaper many consider to be the primary print source for momentum traders gave the company plenty of ink the past three months. From my experience, stocks IBD features in their "New America" column, and are highlighted in the IBD Top Fifty Stocks, tend to stay in motion until dethroned by a bad earnings call. Critero is in the sweet spot for revenue acceleration because of e-commerce trends, and sells for reasonable valuation metrics for a growth technology stock. I anticipate the equity going higher after the next conference call in early August unless expenditures get out of hand.

Analyst expectations are getting elevated for Criteo. Out of the twelve Wall Street firms that cover the stock, ten have a Buy, or, Outperform rating on the security. Last week, RBC Capital Markets initiated coverage with an Outperform rating. This goosed the price per share. If Critero has another good quarter, other brokerage firms will initiate coverage, or, up the ante for price appreciation.

The partnership with Facebook (FB) just got stronger. According to comScore data, Criteo ads reached 1.1 billion unique users worldwide on the desktop in March. Many of these end users may be part of the ever expanding Facebook universe. Now that Facebook has recently released Dynamic Product Ad for mobile devices, Critero has access to Facebook's mobile ad inventory. This could be a boon for sales going forward.

Finally, the Criteo Engine's ability to match shopping data across multiple devices is a new phenomena for the company, and will increase revenues. We have transitioned to a mobile world, and working with end users on desktops, as well as smartphones and tablets, keeps Criteo ahead of the competition. As is, the company has a 90% client retention rate. By the end of last quarter, 84% of customers were using the Criteo multi-screen solution.

Caveats:

Michael Corleone in The Godfather Part II is famous for saying: "Keep your friends close but your enemies closer.". Although the technology sector makes strange bedfellows, Critero should probably follow Michael Corleone's advice. The annual report sites Google (GOOG), Amazon, and Yahoo (YHOO) as well-established competitors. They are also customers. For instance, the latest conference call states several new clients were added including Hubbub, a subsidiary of Amazon.

In addition, Google is also one of the largest publishers working with Critero on the supply side. As Investor's Business Daily reported:

"In the self-serve formula, retailers or advertisers can bypass a manager such as Critero and go directly to ad platforms found on Facebook, Google or other ad publishers and suppliers. This path poses a competitive threat to Critero.".

We live in a do-it-yourself world, and companies are always looking for ways to cut costs, and raise productivity.

Plus, there's always the threat of Criteo's bread and butter technology being leapfrogged by another entity. Two weeks ago, Apple (AAPL) announced a content-blocking feature for the soon to be released iOS 9. This translates into blocking banner ads in mobile browsers. Stocks in the advertising sector went down in unison for a week following this announcement. This includes Criteo. The stock has bounced back in tandem with the overall market during the past seven trading sessions.

Valuation:

This is not an expensive stock using traditional P/E and PEG Ratios. Although the trailing twelve month P/E is a lofty 74, the company's earnings are growing close to 89% for the current quarter. This gives us a PEG ratio of below one. That's in the wheelhouse for many technology investors. Wall Street is always looking forward, and when we examine the forward P/E ratio for the end of 2016, it decreases to 35. Trailing twelve month price/sales is also very reasonable at 3.5. Not dirt cheap, but you're not going to get a growth stock at distressed prices in this investing environment.

Conclusion:

Critero trades at an all time of $55, bucking the trend of European equities that have faced serious tailwinds in a recessionary environment. Nevertheless, this is a dangerous stock because of its small market cap of 3.5 billion, plus the fleeting nature of technology superiority in individual companies in the early 21st Century. However, the window for investors to hold an equity gets smaller and smaller as each day passes with actively managed mutual fund managers trying to beat high frequency trading platforms and index benchmarks like the S&P 500. I believe if you have a holding period of three to six months, you may make money with this one.

Twitter: A Bottom Fisher's Perspective

"A-Well-A Everybody's Heard About The Bird." - The Trashmen signing 'Surfin' Bird' circa 1963.

The Twitter (TWTR) logo is one of the most recognized icons of the past few years. It permeates the media landscape on The Internet, and on broadcast television. Go to ESPN, Reality TV Programs, Game Shows, Talk Shows, or your local and national newscasts, and attempt to avoid it. It can't be done. It's everywhere.

Although Twitter is an integral part of contemporary culture, all that free publicity hasn't added up to a very profitable company, or, total world domination like its contemporary Facebook (FB). Facebook has over a billion Monthly Active Users while Twitter languishes at over 300 million. Why? Twitter is more difficult to use. Twitter isn't a plug-and-play application on the desktop computer, or, on your smartphone the way that Mr. Zuckerberg's products are. Quite the opposite. You must have some computer knowledge, or at least have the technological intuition to begin building a timeline on Twitter.

During the 2015 Q1 Conference Call, former CEO Dick Costolo (who still has a relationship with the company although co-founder Jack Dorsey is back at the helm as interim CEO) stated: "After five consecutive quarters of more than 97% year-over-year revenue growth, we under performed against our expectations. We anticipate the factors that affected our first quarter results will also affect our 2015 guidance.". This translates into a potentially rough six months for the company. Wall Street took notice and the stock got hammered, dropping from close to its 52 week high of $55/share to the mid $30 range where it currently trades. It got as high as $75 in late 2013.

Twitter makes most of its sales from advertising, and revenue growth decreased to 74% for the quarter. It's commonly known that there's been a big migration of advertising dollars from traditional media such as newspapers, magazines and television to the Internet. There's also the current movement from personal computers to mobile devices. Advertising budgets follow the eyeballs, and the big players in both the desktop and mobile arena are Facebook and Google (GOOG). A December 2014 eMarketer article breaks down and projects the domestic mobile advertising market to 2016.

As is presented, Twitter only maintains a three plus percent share of the American mobile marketplace through 2016. The United States is where they do the bulk of their business. However, they do have an international presence, and are working on improving the existing product. If you go by the chart, Twitter isn't picking up too much market share. During the last conference call, former CEO Costolo notes that there is a company-wide three prong approach to building the consumer base to increase those eyeballs and click throughs for the advertisers:

• Strengthen Twitter's core. (Make it easier for novice users to create timelines, and engage in activity. Easier said than done. Once you lose a customer, it is difficult to get them back.)
• Remove barriers to consumption. (Increase the monthly active users. Besides the 300 million monthly active users, an additional half billion people monthly visit Twitter, but don't utilize the service to its fullest potential.)
• Build new applications and services.(For example, the relatively new service Periscope which enables end users to create video vérité on their smartphones, and share it with the Twitter's minions.)

Despite the game of musical chairs in the executive suite, Wall Street bulls point to Twitter's potential. The current company game plan requires an enormous cash outlay to build infrastructure, and increase selling, general and administrative expenses. Last quarter, Twitter took in $436 million, but spent $389 million in non-GAAP expenses. As a result, Q1 GAAP EPS was reported at ($0.25) and non-GAAP EPS of $0.07.

Bottom line is that Twitter isn't making much money, but neither are Amazon (AMZN) and Netflix (NFLX), two other companies that dominate the decade, but that hasn't stopped their shares from moving to all time highs. Twitter, on the other hand, is getting close to its all time low. Granted, all three companies have different business models, but Twitter is the one based on advertising sales. Advertising budgets are usually set on an annual basis, and those advertising dollars may not be allocated to Twitter until the end of the year.

Full disclosure, I'm one of the 300 million monthly active users on Twitter and am a big fan of the company, but not the stock because of lofty valuations. For instance, for full year 2015, the company estimates sales to be between $2.12 billion to $2.27 billion. That's with Twitter's current market cap of $24 billion. Very expensive.

Because Twitter lacks substantial earnings, you really can't value it on a P/E, or PEG basis. My personal preference for technology companies is the price-to-earnings divided by growth calculation. Not going to work for this one, which further solidifies my belief that it should never have gone public. Twitter could have raised needed capital via private equity the way that Uber and Airbnb do.

Trailing twelve month price/sales is 14.5. Ken Fisher, who developed the metric back in the early 1990's, believes it may not be as accurate a barometer as it once was, but it's still useful nonetheless when you've got nothing else to go on. Even if you double sales the next twelve months, the price/sales ratio would still be humongous based on Mr. Fisher's teachings.

Based on consensus analyst expectations, Yahoo! Finance reports better numbers going forward for Twitter. The problem with utilizing average analyst expectations, is that they vary to a great degree. It's like Donald Trump claiming he's worth 10 billion dollars, then Forbes refuting that and saying it's more like four billion. However, it's what we have to go by because it's a relatively new public company.

EPS for full year 2015 is $.34, with the lion's share coming in the December quarter. For 2016, this number almost doubles to $.67 for the full year. Impressive growth, but what if they continue to spend money for expenses at unreasonable levels, and gain market share at a snail's pace?

There's not a big short float on the stock, just 4.6%, so the Wall Street believes Twitter may be reasonably valued. Twitter's IPO price was $26, but it opened at $46 on the first day of trading. From my perspective, the investment bankers got the valuation correctly, and the stock may get back to a more reasonable level after the next conference call on July 28th.

At this juncture in time, I wouldn't pay any more than $25/share for Twitter. I'm not going to chase it, especially when we are so close to the next earnings release. Although I believe the equity should be given a premium because of its unique communications platform (it really has no peer except Facebook, and that's not an apple to apple comparison), I'm betting that it may go lower based on valuation, the nature of the advertising business, and the upheaval at the helm.

It Was a Very Good Year

In 2013, the S&P 500 was up 32.39% when you include dividends. Individuals in S&P 500 Index Funds such as the Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 (IVV) or the more renown SPRD S&P 500 (SPY), did a land office business. Hedge funds didn't fare so well according to Bloomberg Business, "Hedge funds returned an average of 7.4 percent in 2013, after a gain of less than 0.1 percent in December...Funds lagged behind the S&P 500 by 23 percentage points.".

Fast forward to 2014, and again, the S&P 500 index was up a compelling 13.69% including dividends. BarclayHedge (no affiliation with Barclay's Bank) research shows that Hedge Funds also lagged the S&P 500 in 2014 with only a 2.88% gain. That's not to say all Hedge Funds did poorly, just on the aggregate, the average Hedge Fund under performed passive investing by a long shot. I think it should be stated that by nature Hedge Funds are "hedged" to protect the investor when the market depreciates, so you wouldn't expect some of them to have banner years in an uptrend in the markets.

Nevertheless, statistics show since the crash of 2008-2009, index investing has handily beaten their more expensive competitors, the Hedge Fund. It is also common knowledge in investing circles that over the long term, actively managed mutual funds tend to lag the primary American benchmark, the S&P 500, the majority of the time. There are instances when various sector mutual funds and ETFs outperform the S&P 500. As an example, for the past three years, biotechnology funds and ETFs have been very good to investors. iShares Nasdaq Biotechnology ETF (IBB) gained 177% in the past three years, and is up almost 30% year-to-date in a flat year for the S&P 500.

However, hot sectors like biotechnology tend to be outliers. There's also the dilemma of when to get in and when to get out. Market and sector timing is an inexact science for the novice and professional alike. It's because most actively managed portfolios tend to lag the market, I liquidated all if my individual equity positions at the end of 2013 after a less than stellar performance, and have gone into well diversified index ETFs. In 2013, I didn't do as poorly as the hedge funds, but I left more money on the table than I wanted to in a concentrated portfolio of primarily small to mid cap securities.

Small to mid cap stocks tend to be very volatile. You must have a cast iron stomach to roll with the punches in a high beta tape. I bought Facebook (FB) after it got cut in half at $18, and this resulted in a four bagger in a little less than two years. Somewhat lucky, but a good call nonetheless. However, there were too many others that didn't fare so well, primarily in the smartphone infrastructure and component arena. Although this is a very exciting time in which we live in regards to technology companies, the game changing science in many of these equities becomes obsolete in a matter of months.

I prefer to buy and hold my investments to minimize trading costs and capital gains taxes. Investing in some of the smaller entities that power our iPhones and Android devices seemed like a prudent idea for a small period of time, but didn't pan out the way that I planned. I had to trade too much to keep up with the ever changing computer science. This, coupled with the undeniable statistics that passive investing in a well diversified index fund or ETF is better for your bottom line, caused me to alter my investment thesis.

Back in the late 1990's, I read "Winning the Loser's Game" by Charles Ellis, which is considered the bible for index investors. At that juncture, I was on a hot streak in NASDAQ stocks like Cisco (CSCO) which needs no introduction if you were investing at that time. I fully understood and appreciated the concept Mr. Ellis discussed in the book, but my personal preference was with Robert Hagstrom and his best seller "The Warren Buffett Way". Hagstrom's contention that a concentrated portfolio is the optimal way to invest if you follow the wisdom of The Oracle of Omaha. I followed the advice of Mr. Buffett, and did well.

Times have changed. With the advent of High Frequency Trading, and computerized Web bots that scour the Internet at warp speed assimilating information, the teachings of Benjamin Graham and David Dodd seem outdated in today's world. Although I believe the concepts of "Security Analysis" are still intact, Warren Buffett, the most famous pupil of Value Investing, suggests that individuals use a plain old vanilla index fund. That's a good enough endorsement for me.

So where does that leave this blog? After a sixteen month hiatus, I have decided to continue writing articles about ETFs and individual securities. Although 95% of my equity investment allocation is in either S&P 500 index ETFs, and to a lesser degree the Vanguard FTSE Europe ETF (VGK), I'm still sitting on a small cash position. There are always alpha opportunities to be had in sector ETFs like The Pure Cyber Security ETF (HACK), which has outperformed the market this year, and individual stocks like Netflix (NFLX) and Apple (AAPL) which have also done well. I am not planning on buying or writing about any of these at this point, but they are examples of what is to come going forward.