This is a great ad, because it both gets us shaken up about “secret” technologies that the world’s largest companies are using to take control of your computer… and it gets us revved up a bout the “shocking story” of how we can “turn the tables” and “ride this invention to gains of up to 4,778%.”
Sounds like fun, right?
The ad is from Linda McDonough for a newsletter called Profit Catalyst Alert, put out by Investing Daily, and she catches our attention with a “tiny dot” that she says is all over the internet… on every website from CNN.com to Amazon to Google.
What? A tiny dot? And it’s on your phone, too, and on your tablet? What the heck?
Don’t worry, the “dot” is just a convenient way of describing internet tracking, which is mostly enabled by cookies (software that websites put into your browser so they know where you’ve been, and if you’ve visited their site before). Sure, lots of people don’t like it… but it’s been around for as long as consumers have been using the internet, and the various tracking technologies continue to get more sophisticated in the service of both convenience and user service and, much more importantly, advertising and improving the conversion rate in the sales process.
Here’s a bit of the ad, to give you a sense of how McDonough is selling this idea:
“Hidden in plain sight.
“Think about that for just a moment.
“Google delivers search results over 100 billion times a month.
“Every single time someone goes to their site to look for something…Are you getting our free Daily Update
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“And every single time Google displays the results…
“This mysterious dot shows up.
“And someone makes money.
“That’s trillions upon trillions of times.
“Yet I’m betting only one out of every 1,000,000 people who use Google even know it’s there.
“And there’s a reason for that.
“The dot I’m talking about is tiny.
“So much so, that it’s not visible to the naked eye.”
So how is it that this dot is going to make us rich? More from the ad:
“It’s the key to unlocking a $3.5 trillion fortune.
“This technology could change your financial future in a drastically positive way.
“I promise you, that’s not a hunch. Or wishful thinking.
“The use of these powerful little dots is already so widespread that I guarantee there are thousands of them working on your screen right now.”
But anyway, this all has to come down to “one small company” if we’re going to get rich from this “tiny dot,” right?
Yes, the ad doesn’t disappoint — it builds that big picture idea of “tiny dots” that know what you’re doing and keep track of you… then implies that there’s “one tiny company” that is the real winner of this big technological trend. Here’s more from the ad:
“… thanks to a stunning new advancement—one tiny company I’m about to show you has figured out a way to create stunning profits with them. Every single time they’re used.
“Best of all, their invention works on EVERY device from EVERY brand name out there.
“It’s so adaptable, it even works on old phones….
“This powerful technology is called a beacon.
“And while these beacons might be microscopic, the impact they’re about to have on our world is MASSIVE.
“In fact, I believe the companies that master how to use them have the potential to create more millionaires than Google, Facebook, and Amazon…combined.
“And it wouldn’t shock me one bit if, 10 years from now…
“These tiny dots were the reason 10,000 or more Americans retired earlier than they ever dreamed.”
So… what is this? How do we know that these “tiny dots” are going to be so valuable, or that some big buyer will want to acquire this “tiny company?” We get a few more inducements about the value…
“Google just laid down $3.1 billion for a stake in them…
“Verizon spent $4.4 billion for its own slice…
“And even though Twitter is a much smaller company, they paid $533 million to get access to their power.
“It’s no surprise why…
“This technology holds the key to a $3.5 trillion fortune.
“One that Internet industry veterans say is ‘very comparable to search.'”
Those are references to Google’s purchase of Doubleclick back in 2007, which was their entree into display advertising, and Verizon’s advertising-motivated acquisition of AOL last year (though their Yahoo acquisition now under review is similarly ad-motivated) — and Twitter’s $533 million buy was also last year, that’s when they bought TwllApart, which was an advertising technology startup (they reportedly specialize in direct response ads and in cross-device tracking).
So if all those companies are buying all those advertising firms, and all trying to use these “tiny dots” to track you, it’s obviously not something that’s controlled by “one tiny company.”
But that doesn’t mean this company they’re teasing is junk, of course, it just means it’s not as exciting as the ad implies — that’s pretty much always true. So what is the company? Let’s check the clues, McDonough gets a bit more specific as we cruise through the “presentation”….
“Just days ago, Goldman Sachs, not one for off-the-cuff predictions, put this company on a short list of candidates that could be acquired at any minute…
“And after Microsoft announced its $26 billion buyout of LinkedIn, Evan Wilson, a respected analyst from research firm Pacific Crest Securities, listed this company as a “most likely acquisition” with a “wide number of potential acquirers.”
“That’s just the beginning though.
“Because even if they’re not snapped up by a deep-pocketed powerhouse like Google…
“You still win.
“You see, there’s so much positive news hidden in this company’s financials…
“And it has such an unfair advantage over its competition….
“It wouldn’t surprise me at all if it DOUBLES its share price in the coming weeks based strictly on the news of its performance alone.
“Which simply means…
“You need to make your move now—before it’s too late.”
So what technology is this company actually selling? Any more specifics?
“Advertisers now spend more money running ads online than ANYWHERE else.
“In fact, their spending is set to hit an astounding $240 billion in just a few years.
“So it should come as no surprise that a technology that can increase clicks—and revenue—by 7x is starting to show up on sites that rely on advertising to make money.
“Like Google, Facebook, Yahoo, Russia’s equivalent of Google called Yandex, and even China’s biggest search engine Baidu….
“This technology doesn’t just represent a way for titans like Google and Facebook to increase revenue though…
“It’s a paradigm shift that will forever alter how companies do business online.
“And as it unfolds it will create a myriad of triple—and quadruple-digit profit opportunities.
“The first of which, I’m urging readers of my Profit Catalyst Alert research service to buy immediately.”
There! That “the first of which” one… that’s what we’re trying to name for you today. More hints, lease, Ms. McDonough?
“You see, in addition to increasing traffic by 700%–the astounding technology behind these dots allows online retailers to show each visitor exactly what they’re looking for as soon as they get to the site.
“And this advanced knowledge helps them generate $17 in sales for every $1 they spend to get a customer there.
“Imagine Amazon—a company that handed early investors gains of 1,616%–getting 7x the traffic they’re getting now….
“And making $17 MORE for every $1 they spend to get it….
“That’s the power these tiny dots hold…..
“The technology I’m about to show you now—and the company behind it—is the single biggest opportunity of your investing lifetime.
“Because even though these powerful little dots show up on billions of devices
“The value of the company behind them is 300 times smaller than Google.
“Which simply means the upside potential is unparalleled.”
Long on dreams of riches, but a little short on specifics — so far we’ve got that 700% increase in traffic that this technology supposedly provides, and we’ve also got the $17 in sales from each $1 invested in customer acquisition… that’s probably from some ad tech company’s power point slides… how about a few more clues?
“And they developed a complex artificial intelligence program, running on a bank of over 22,000 processers, to predict what you want based on everything you do on the internet.
“From what sites you visit…and what articles you read…
“To what products you buy…
“Their tiny dot is there and collects it all.
“The next time you visit a website—within the second or so it takes to load—this tiny dot figures out who you are. And what may want to buy.
“It matches that knowledge up with a retailer who has the right product. The right ad. And is willing to pay the right price to have you click on it…
“Then it pushes that ad to the website you’re on….
“This Tiny Company Has Unlocked the Holy Grail of E-Commerce.
“I’m talking about multi-device advertising….
“This company’s technology is so powerful—and its customer base of both publishers and retailers is so massive—no matter what site you visited…and no matter what device you viewed it on…
“You got an ad based on something you were looking for…until you bought one.
“Having the capability to “always be there” no matter what device a customer is using is a groundbreaking advancement…
One that only THIS company has.”
And then we get one more clue, a hint about the share price of this stock:
“When this company gets a buyout offer, it’s going to be massive.
“In fact, it wouldn’t shock me at all to see a flood of big name institutional investors loading up on this stock in the coming weeks trying to get positioned before that happens.
“That’s why it’s critical for you to make your move now.
“You can pick up shares today for less than $50. But you have to move fast.”
So who is it? Well, some of you might be pleased to know that it’s a stock I’ve written about quite a few times in the past, this is Criteo (CRTO), the French ad-tech firm that specializes in retargeting.
I featured Criteo as my “idea of the month” back in the Spring of 2014, when the stock was getting clobbered as a “washed out IPO” from the previous year — I thought it was a solid company being discarded because investors gave up on the then-hot “ad tech” sector quickly in the wake of some weak results, this is what I said about it at the time:
“They are an e-commerce focused retail advertising specialist, with strength in both retail and travel particularly, and they partner with companies to get very deep drill-down data on their customers and site visitors that they can then use to retarget those customers… so, for example, if you search for flights to Las Vegas on Expedia but don’t buy anything, then are later browsing through the web (at StockGumshoe.com, naturally), you might see an Expedia ad served to you about new, lower prices on vacation packages to Las Vegas. That’s an oversimplification of what they do, and they are not the only ones who do this, but they have a large and complex system of predictive and learning algorithms that track retail customers to help improve sales. Their business is based on cost-per-click, but it involves a much tighter relationship with their advertising customers than simply charging them 40 cents to send them a person who is interested in flights to Las Vegas. They “observed” sales of $270 billion on their clients’ websites in 2013, which is valuable data that they use, adding that client data to their increasingly powerful “prediction engine” and tracking customers across devices to improve the power of marketing.
“And while I cannot judge whether or not Criteo has a better engine than Rocket Fuel (FUEL) or The Rubicon (RUBI) or the many other “ad tech” names, what caught my eye is that they are growing and they are profitable and generating free cash flow, and they are showing a very good record of growing their client base (more than 5,500 clients now, with a push into more midsize companies helping to double that number over the last 18 months) and retaining their clients (better than 90% retention). So they are definitely doing something right.”
Which is a short way of saying, “if there’s a hot sector that makes sense and should be growing, there’s a good chance that the company who stands out because they’re making a profit while their competitors are burning cash is doing something better than the other guys.” And that continues to hold true for Criteo and their competitors, most of which have been disastrous investments.
Criteo has continued to grow their customer base, and continued to grow profits, and the stock is still pretty expensive — as befits a small growth stock. Some of that relatively high valuation is because we do often hear rumors that Criteo is a takeover target — I don’t know if those rumors actually hold any water, it would be a hard company for Facebook or Google to acquire in some ways because they probably get more data from companies about conversions and customers than those companies would freely give to Facebook or Google (I don’t know that for sure, but it’s a concern of mine), but other than that it would make sense to see them acquired — the technology is not infinitely scalable, but it could certainly grow more dramatically if they had easy access to more traffic and ad inventory like a larger company or publisher could provide. There have been articles in the past pondering the likelihood of a takeover by one of the big global ad agencies, in addition to the usual suspects (Microsoft, Google, Amazon, Facebook, etc.).
So that’s remains out there as a tantalizing possibility, though it’s not usually wise to buy a stock because you’re anticipating a takeover — that just leads to sloppy thinking, if lots of people are anticipating a takeover that never comes then the stock is probably overpriced because of that attention. You need to have a good case to be made for the business to persist as a stand-alone company as well.
And on that front, I’m still pretty confident in Criteo — I don’t actually hold the equity right now, though I have a synthetic long position (I sold puts and bought calls) and would be happy to buy the stock in the low $40s. Here’s what I wrote about it for the Irregulars in the Friday File last week:
“Criteo (CRTO) has gotten a fair amount of attention lately, originally because there’s been a fairly high-profile lawsuit between Criteo and a US ad tech company called Steelhouse, and now because the Facebook and Google earnings were so fantastic that everyone’s getting a little excited about online advertising in general… and perhaps sniffing around for the possibility of a wave of mergers and acquisitions that could again spur takeover rumors for the smaller players like Criteo.
“The lawsuit I can’t help you with — Criteo sued Steelhouse for click fraud, and Steelhouse countered with allegations that Criteo’s clicks look suspicious and it’s slandering Steelhouse and scaring away customers. Steelhouse is well-funded, they got their largest venture funding round of $49 million back in December, but they’re a lot younger and smaller than Criteo (CRTO was founded in 2005, Steelhouse got its first funding in 2010). Presumably there’s some long tail risk there of something happening, but I’m not specifically worried about that legal fight.
“Criteo is really an outlier in the ad tech space, and that really is a big part of the reason I like it. I am currently long CRTO artificially in my personal account, through options, but would also be happy to own the equity in the low $40s. This Wall Street Journal piece from last month sums up the situation pretty well when it comes to Criteo’s fundamentals and stock performance: They are often lumped in with other “ad tech” companies, but unlike almost all of them Criteo has been consistently profitable for years and has a strong and growing base of customers with whom they have a pretty deep data connection, and a revenue stream that’s based on performance (which advertisers love, of course — they’d rather pay $5 for a click if that person buys a $300 item than pay 50 cents per click for ten different people who browse but don’t buy anything). Criteo is also a buyer of some ad space on Stock Gumshoe sometimes, so I should note that as a potential source of bias (so is Google). If you’re in a space where everyone is fighting for virtual real estate and customers and you’re the one that’s most consistently profitable and growing (the others are rarely profitable, and are mostly not even growing revenue right now with the exception of Rubicon (RUBI)), then you’re simply doing something better.
“Analysts think they’ll grow earnings better than 30% this year and 25% next year. Those analysts could obviously be wrong (they’ve had trouble forecasting CRTO earnings in the past), and there are real challenges — not just this lawsuit and countersuit, whatever merit they might have, but currencies (their growth is in the US and Asia, but their largest market is still Europe) and competition are always right around the corner, and they are going to have to remain integrated with Facebook and Google and on good terms with those advertising platforms to remain a viable business, which creates risk because of their vulnerability to changes in those businesses…. but that’s excellent growth for a company that’s only trading at 19 times next year’s earnings, and CRTO remains both a good growth stock and a “maybe someday” acquisition candidate… and the only one of the sometimes high-profile small “ad tech” companies that has any kind of reasonable fundamental performance when it comes to their income statement…
“… but though the ad market has folks a little smiley again after Facebook and Google, we should remember that Criteo hasn’t reported yet — their second quarter numbers will come out on Wednesday next week, so don’t jump in to do anything crazy unless you’re consciously making a bet about whether the earnings will be great or lousy in relation to analyst estimates or whether they’ll say something about market conditions or the remainder of the year that makes investors crow or cringe (they’ve beaten estimates handily in the last two quarters, but trailed estimates in the two quarters before that, for whatever that’s worth).”
And now you know what I know — CRTO should report the day after tomorrow, so it would be risky to rush into anything, but I like the progress they’ve shown over the past couple years in building a consistently profitable business… and, as Facebook and Google pretty clearly showed, the tailwinds are still there for the digital advertising business in general. That doesn’t guarantee anything, of course, and I don’t think there’s anything inevitable about the “dominance” of a little company like this in a huge industry… I would urge you not to begin your due diligence on this stock with that notion that you’re somehow going to generate 4,778% returns, for sure, but I still like Criteo and await the quarterly report with some interest.
What do you think? Have thoughts on Criteo or web privacy or advertising that you’d like to share? Let us know with a comment below.
Disclosure: I have positions in Criteo, Facebook, Google and Verizon of the stocks mentioned above, through either call options or common stock (or both). I will not trade any of the stocks covered above for at least three days per Stock Gumshoe’s rules.