Is Criteo Stock a Buy?

It has been a tough year for internet companies that rely on user data to make money. Consumers and government regulators alike have been asking tough questions about how personal information shared online is being used by advertisers and other interested parties.

Ad-retargeting company Criteo (CRTO 3.08%) -- which uses your online behavior to determine what ads you'll be most interested in -- has not gone unscathed. 2018 has been an up-and-down kind of year for the stock, and shares are currently sitting at a 13% loss for the year. Finding ways to make money from people's online behavior is an increasingly difficult realm to navigate, and it doesn't help living in the shadow of advertising giants like Facebook and Google parent Alphabet. With multiple headwinds acting against Criteo's progress, its shares look cheap. The company could be a great rebound play, but investors should remember that stocks are usually cheap for a reason.

By the numbers

Data source: Criteo quarterly earnings.

The first-half 2018 financial results at Criteo look good, but there's a caveat. Second-quarter revenue fell 1% and increased 5% excluding traffic acquisition costs (TAC) as the company alters its mix of advertising revenues. Full-year revenue excluding TAC is expected to come in flat from 2017, plus or minus 1%. That implies a significant slowdown for the balance of 2018.

Profitability got a big boost from lower TAC and operating expenses increasing at a slower rate. That hasn't been enough to get the stock moving up, though. That's because with revenue starting to head in the wrong direction and Criteo getting ready to do a business overhaul, the big bottom-line jump could soon reverse course.

Image source: Getty Images.

What does Criteo do exactly?

Criteo is an ad-retargeting company, working with online retailers to get advertisements to users on their web browsers. For example, if you've recently done an online search for coats to get ready for the winter months, you may have started noticing banner ads showing off coats from the online stores you visited.

Criteo talks up being an advertiser on the open internet -- it doesn't run its own website, web browser, or app, but rather displays ads across a variety of mediums. That contrasts with the two elephants, Google and Facebook, which will command an estimated 56% of total digital ad spending in the U.S. in 2018. Plus, Criteo has new competition like Amazon and its burgeoning marketing business throwing up proprietary walls. 

Management says retailers are hungry for other promotional outlets with fewer strings attached. That's where Criteo comes in, but the company has had struggles on another front as of late. Apple has been cracking down on third-party data use on its operating system and web browser, hindering the kind of data usage Criteo relies on to get marketing messages in front of internet users' eyes. That has been a big reason for the taper in revenue growth this year.

With ad retargeting under pressure from multiple fronts, Criteo is beginning a transformational effort. The company has been relying on a single-product solution -- pay-per-click targeted ads -- but will begin working in other variable forms of payment and new ad products for its customers.

One area of expansion is in-app advertisements, which don't rely on behavior-tracking algorithms to deliver relevant promotions like a web browser does. The acquisition of start-up Storetail was also recently announced, giving Criteo the ability to help retailers deliver data-driven ads via their own websites rather than on the open internet.

Good in theory, but with an asterisk

Criteo CEO JB Rudelle thinks that a multiproduct platform can help the company return to growth in the coming years. Making an overhaul like this while up against a crowded online ad industry will be tough work, though. Reflecting the challenges ahead, the stock carries a one-year trailing price-to-earnings ratio of just 14.5 and price-to-free-cash-flow of 9.0.

The good news is that the company has plenty of customers and keeps adding more. There were 19,000 customers using Criteo at the end of the second quarter, a 16% year-over-year increase. That bodes well for the company being able to find an outlet for its new digital product platform and makes the stock an intriguing consideration for investors looking for value. However, with digital data use concerns cropping up and Criteo's monstrous competition steering the industry, investors would be wise to keep any investment in the stock small.