market folly

We're posting up notes from the Sohn London conference 2017.  Next up is Selvan Masil of Westray Capital Management who pitched a long of Criteo (NAS:CRTO) and a short of Cineworld (LON:CINE).


Selvan Masil's Sohn London Presentation

Long Criteo (NAS:CRTO)

Criteo is a French technology company with a market cap of $2.1bn that is listed on the Nasdaq.

What does Criteo do? It helps retailers to covert online shoppers using browsing behaviour to deliver targeted advertising. It does this by being directly integrated into the advertiser’s website. Criteo learns our preferences as we browse. More than two-thirds of its revenue is generated on mobile devices. It can link people’s identities across devices and it can send advertising to mobile, laptop, via Facebook as well as in-app.

What makes Criteo a good investment? It has a very strong position in a fast-growing market. Digital’s share of the advertising budget is projected to grow from 29% in 2015 to 43% in 2020. The fastest growing segment in digital advertising is programmatic. This segment, where Criteo operates, is growing at 25% CAGR 2015-2020.

It is the largest independent player in the programmatic space, third overall behind Facebook and Google. It’s 5x the size of the next independent competitor. Having an independent player is important for all sides. Many e-commerce retailers and web publishers don’t want to give Google and Facebook full access to their sensitive customer data. Facebook and Google value automated and scalable solutions and prefer to deal directly with advertisers.

Criteo has recently started integrating offline CRM data by using data from loyalty cards, credit cards and other unique indentifiers. That level of integration between off-line and on-line shopping is the holy grail for most retailers and will increase the value of Criteo’s database.

Every time internet users browse a website of one of its clients, Criteo tracks the entire purchasing and browsing activity regardless of how the user ended up on that website. Critieo sees more than twice the number of transactions than Amazon. In addition, it tracked users browsing and purchasing activity on 4bn products – more than each of Amazon, Alibaba and Ebay. This unparalleled scale should allow Criteo to send the right ads to the right person at the right time. It creates self-reinforcing network effects. The more clients you have the more data you collect. The more data you have the better the performance of your apps. That in turn helps you attract more clients and generate more data.

The value of the data can be seen in the click-through rates – the proportion of ads that generate a click - that are 4x higher than the industry average. They are second to Facebook on click-through and only just.

Criteo is virtually alone in the industry in charging advertisers based on post click sales. Most digital advertising companies still charge a fee every time the ad is displayed regardless of whether the consumer interreacts with it or not. As a result, many clients have given Criteo an unlimited budget as they only pay for advertising when they make a sale. More than 75% of Criteo’s revenues come from such clients. On average it generates 18x return on investment for clients.

Westray’s interviews with clients, competitors and publishers find that Criteo is consistently ranked best for performance, superior to even Google.

Criteo’s stock has de-rated recently on fears that a new version of Apple’s Safari browser will contain something called Intelligent Tracking Prevention that may disrupt digital advertising players. Masil believes that Criteo has the tech knowhow to be able to deal with this.

The company is undervalued on nearly all metrics. It will continue to grow revenue at a CAGR of 20% between 2016 and 2020 with even higher growth rates for EBITDA. Criteo is unusual among tech companies in that it is highly cash generative. At the end of 2017 the company will have 17-18% of its market cap in cash.


Short Cineworld (LON: CINE)

Cineworld is a cinema operator. Last week Cineworld announced its intentions to buy Regal, the second largest cinema operator in the US. The shares sold off 20%. Masil said that was not part of their original thesis but that the potential purchase of Regal reinforces their negative stance.

Cineworld is one of Europe’s largest operators with 226 cinemas and 2100 screens. It generates 55% of its EBITDA in the UK and Ireland. Most of the rest comes from eastern European countries. Two-thirds of revenue comes from ticket sales and one-third from selling food and drink.

-    The UK cinema market is mature and ex-growth.

-    The company has been expanding aggressively in the UK which is a flawed strategy.

-    Younger people go to the cinema less and instead consume content online.

-    It will be hard to put ticket prices up further. They have already been put up well ahead of inflation.

-    Cineworld is suffering a downturn in admissions per screen. A 5% decline in admissions per screen leads to a 15% decline in EBITDA

-    The structural pressure on the cinema industry is intensifying.

-    The period in which cinemas can show new films exclusively without them being shown online is reducing.

-    Amazon and Netflix are making their own content and growing their customer base rapidly

-    The performance of Cineworld shares has outperformed the sector for no good reason.

-    Cineworld trades at a forward P/E 18x 2018. Capex is high as the cinemas require constant refurbishing.


Be sure to check out the rest of the presentations from Sohn London 2017.