GEO Investing

Digital marketing and online advertising company Criteo (CRTO) has been a tough stock to figure out during this volatile market.

Over the last couple of weeks, the market has swatted the company off of its highs near $55 for a couple of reasons.

First, the company’s valuation is looking optimistic in a market that has been unable to make up its mind about which direction it wants to head. The Federal Reserve and global economic uncertainty have cause the bull market to become unhinged from its track upward. Companies like CRTO, which are trading at about 25 times their estimates for next year, aren’t exactly the safe havens that investors flock to during a potential bear market.

With that being said, we think CRTO can be looked at as a fantastic growth story — EPS and revenue are both slated to grow almost 50% year over year.

Second, the stock has been hit on the news that Apple was planning on modifying its Safari software to be able to block pop up ads and allow the user to prevent additional advertisements.

It is tough, in a market like today’s, for any leniency to be extended upon companies that are trading at premiums to reasonable multiples. In this case, you have a negative catalyst in the recent Apple new that we believe won’t have a lasting effect on holding the stock lower. Why? Simple. Internet ads are like cockroaches, they’re going to continue one way or another, with or without the blessing of the software or the user. Take a look at how much “spam” still gets through to your primary Inbox, for example. Like superbugs, as ad prevention gets smarter, ads evolve to outsmart it.

With the stock off over 30% from its highs, we’re taking a look because we believe a buyout may make sense at these levels.

The bull case for us on CRTO is the question of whether or not it makes enough sense for a company like Alibaba — who CRTO appears to recently have entered into business with – or Google to move in and simply acquire Criteo, rather than compete against it, now that it’s valuation has been compressed. With the valuation well off its highs and companies like Amazon in the potential hunt, it would benefit a suitor to act sooner than later in launching a bid for the company.

Specifically, we don’t think it’s impossible that Alibaba could take a shot at buying the company. It makes sense, and they both now appear to be working together. Investor’s Business Daily, prompted by a Pacific Crest Securities note, put out this analysis on September 29th:

Targeted digital ad firm Criteo now embeds cookies in more than half of the 100 largest retail and travel websites in the U.S. and appears poised to win business in China by teaming up with e-commerce giant Alibaba Group, says Pacific Crest Securities.

With Criteo set to grow aggressively and the competitive landscape for what they do dominated by a few key players and mega cap companies, doesn’t it make sense for someone to make a bid for them here?

– Dan

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