- The shift from traditional display ads to programmatic ads has been benefiting companies that sell retargeting products such as Criteo
- Criteo is the market leader in retargeting technology and its products are used by some of the biggest ad publishers including Google and Facebook
- Criteo faces some challenges such as the use of ad-blocking software by Internet users and the use of self-serve ad platforms
- These challenges, however, are not likely to materially affect Criteo's growth and its shares remain a good investment
The shift from traditional display ads to programmatic advertising has been casing all manner of problems for major ad companies. Companies such as LinkedIn (NYSE: LNKD), Yelp (NYSE: YELP), Yahoo (NASDAQ:YHOO), among others, blamed their less-than-ringing quarterly results on this shift. Programmatic advertising is basically a technology that tracks user preferences on the sites they visit and later uses this information to target them with relevant ads when they visit other sites. Programmatic ads was at first used to sell excessive ad inventory and typically sport much lower CPM rates than traditional display ads. But its ability to target the right kind of audiences has made it a hot favorite with marketers who have been shunning traditional display ads in favor of programmatic ads, much to the chagrin of publishers.
But, as usual, there is a silver lining to all this. Criteo (NASDAQ:CRTO), a mid-cap company that went public in November 2013 and provides targeted advertising products, has seen a surge in interest in its retargeting products. Criteo saw its top line grow a blistering 71% during the first quarter to $293 million while earnings grew 200% to $13.4 million during the last quarter. Criteo shares recently sold off by 8% after Apple (NASDAQ:AAPL) announced it was going to integrate ad-blocking software into the upcoming version of its popular Safari browser. Despite this roadblock, a cross-section of analysts recently hiked their Criteo PTs, with Cowen raising its PT to $58, or 23% above current price. The analysts cited Criteo’s leadership in the commercial services advertising industry, as well as the fact that the company’s transaction-focused nature of its products is more like search which implies they are less discretionary, giving Criteo an edge over companies that rely on traditional brand ad campaigns. Despite the recent selloff, Criteo shares are up 18.7% YTD and 43.3% over the past 12 months.
Growth of Programmatic Advertising to Outstrip Adoption of Ad-Blocking Tools
I believe the Wall Street analysts’ calls are spot on. There is no denying that rapid adoption of ad-blocking software is quickly becoming a major source of worry for publishers. Adobe Data and Page Fair released a report that says 144 million people, or 5% of all Internet users, used ad-blocking tools in 2014. That was 70% more users that used the controversial software compared to the previous year. This trend is expected to continue with the number of users employing these tools increasing 50% during the current year. The report says that use of ad-blocking users runs as high as 25% in some countries.
If Apple makes good its threat and integrates ad-blocking extensions in its upcoming version of Safari browser, the potential impact on ad companies and companies that sell retargeting software like Criteo could be tangible. Safari browser remains the most popular mobile device browser with a market share of 48.35%. Mobile advertising is growing much faster than desktop advertising, and this could be threatened if the most important mobile browser integrates ad-blocking software.
Luckily for retargeting companies like Criteo, there is little reason to be worried. eMarketer says that the shift to programmatic advertising is not about to let up steam. Programmatic ad spending will outstrip traditional display ad spending for the first time in the current year. Marketers in the U.S. will spend 55% of their display ad dollars, or $14.8 billion, on programmatic ads in 2015. The growth will continue to hit $20.41 billion, or 63% of display ad spending, in 2016.
So while this trend bears ominous overtones for major publishers such as Google and Facebook, Criteo is not complaining at all. Some ad companies such as LinkedIn are not happy with the current state of affairs and have moved to curb the use of programmatic ads by marketers because their lower CPM rates translate to bad business for publishers. But it’s not likely that many companies will go down this road because marketers would simply take their business to other rival platforms that offer the service. Programmatic ads are not a passing fad but are here to stay.
Criteo is widely regarded as the pioneer of deep data integration. Its engine technology uses algorithms that predict the nature and probability of users engaging with various ads. The technology then provides algorithms that create tailored ads that fit users’ interests. Being a market leader, many leading ad platforms, including Google, Facebook, Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), and AirBnB, among other companies, prefer using Criteo’s products to those of its competitors. This gives Criteo a huge supply of ads to work with.
Being a French-based company, Criteo’s most important market is the EMEA (Europe, Middle East and Africa) where it derives 46% of its revenue. The U.S. market contributes 33% of revenue, but is the company’s fastest-growing since it only entered here recently.
Criteo takes a 40% commission for its managed-ad services, which is about average for the industry. The movement of the industry to self-serve programmatic ads which charge a commission of 10%-20% could provide a headwind for Criteo in the future. Self-serve ads allow marketers to bypass ad-managers such as Criteo and use ad platforms available on publishers’ sites. This is, however, not likely to be a major road-block for Criteo since a lot of smaller companies (which contribute the bulk of ad dollars) still prefer to use ad-managers such as Criteo.
Just like any growth company, Criteo faces some challenges that it will have to overcome as it continues to mature. But, being a market leader in retargeting technology has given the company a huge leg up its competition which is working in Criteo’s favor as the shift to programmatic advertising continues. The shares remain fairly valued and are a good buy.