Relatively new to the board, first time poster. Found an intriguing stock that I wanted to gauge others’ opinions on.
Here’s a succinct overview of the business model from a S.A. article penned by Pinxter Analytics.
“The company uses their algorithms to target ads to specific individuals and groups based off their billions of online and bank purchase data points which they get via partnerships with big financial institutions like Bank of America (BAC) and JPMorgan Chase (JPM).” Think cash back offers/discounts that your bank offers you for using their card at a particular store.
“The company’s strength lies in its data. Unlike a lot of other online advertising players which get an average of $2.87 for every $1 spent on ads (return on ad spend), Cardlytics, on average, gets $30 for every $1 spent.” How could this discrepancy be so great?
CDLX just posted another great quarter in Q2 with revenue up 37% YoY and billings up 43.5% over the same period.
MAU has increased 100% since Q3 '18. ARPU has consequently dropped, but has plenty of room for expansion.
Based on the TAM I think that stock could eventually have a $10bn market cap (~850MM as of today).
Thoughts?
Strike 1: Growth is awfully lumpy – was this perhaps just a good Q?. 37% in 2Q19, 10% in 1Q19, 22% in 4Q18, 10% in 3Q18, 8% in 2Q18.
Certainly would need more information. Any recent acquisitions? Has anything else changed? Why would they start growing faster consistently?
Strike 2: Gross Margin doesn’t look impressive. “FI Share and other third-party costs” is 27.6m on 48.7m total revenue this quarter. So if that can be taken as COGS, that’s a 43% Gross Margin. Not good.
Strike 3: For me, if there are any question marks at all, I’m pretty much out on a sub-$1b company. At their size, I need 60%+ growth consistently and SaaS-like margins.
And I hate to be a suspicious old fart, but I’ve been around a while, and when someone joins the Motley Fool at the end of last week and makes their first, and only, post in Fooldom to plug a new small-cap stock on our board on the first trading day of this week, I have to be a little suspicious. It may be be totally unjust and unfair on my part, but it’s just what goes on in my head.
Saul
I figured I would probably get a pretty good grilling on my first post and you all did not disappoint.
In response to strike 1:
CDLX recently landed a contract with JPMorgan Chase that caused their MAU to double over the past three quarters. ARPU plummeted from $0.57 in Q4 '18 to $0.33 in Q1 '19. I haven’t found anything concrete as to why, but my guess is that they weren’t able to immediately monetize all of the new JPM users. However, they were able to expand ARPU to $0.4 in Q2 '19 and CDLX forecasts continued ARPU expansion.
I think it could be an interesting play considering that they really don’t have any competition. Also, their service has been shown to cause an 13% increase in incremental card spend after first redemption, and a 17% lift in banking logins following first activation. I assume all banks would like this and welcome this to their platform.
CDLX will continue to add new clients in current verticals and new. The limits are endless: restaurants, ecommerce, travel, grocery, retail, etc. Their 30:1 ROAS (10x the industry standard) is attributable to the massive amount banking data points they have through contracts with big banks (a pretty good moat). Existing clients should continue to expand their account budgets with CDLX.
In response to Strike 2:
Their gross margin is so low because of the fees that they pay out to the banks on the revenue that they drive from their platforms. I checked FY '17 & '18 and it looks like Gross Margin holds steady around 43-44%. CDLX clients may be willing to accept less of the pie if they continue to provide terrific results, but it shouldn’t be relied on as a catalyst because the banks clearly hold more power in the negotiations. The gross margins aren’t 90% like a sexy SaaS, but it might be unfair to looked at this company like you would a traditional SaaS.
Thanks for the response, I have to admit that I was pretty excited when I saw that you & Saul both responded. I love reading each of your analysis on a weekly basis. Cheers
The gross margins aren’t 90% like a sexy SaaS, but it might be unfair to looked at this company like you would a traditional SaaS.
Why would I want to put money in a 35% lumpy company with 40% margins when I can put money in a 50% steady company with 85% margins?
Can’t own them all - and shouldn’t own them all. If something changes in your story, you can jump back in. But In the interim, pour yourself into the best!
In response to strike 1: CDLX recently landed a contract with JPMorgan Chase that caused their MAU to double over the past three quarters. ARPU plummeted from $0.57 in Q4 '18 to $0.33 in Q1 '19. I haven’t found anything concrete as to why, but my guess is that they weren’t able to immediately monetize all of the new JPM users. However, they were able to expand ARPU to $0.4 in Q2 '19 and CDLX forecasts continued ARPU expansion. I think it could be an interesting play considering that they really don’t have any competition. Also, their service has been shown to cause an 13% increase in incremental card spend after first redemption, and a 17% lift in banking logins following first activation. I assume all banks would like this and welcome this to their platform. CDLX will continue to add new clients in current verticals and new. The limits are endless: restaurants, ecommerce, travel, grocery, retail, etc. Their 30:1 ROAS (10x the industry standard) is attributable to the massive amount banking data points they have through contracts with big banks (a pretty good moat). Existing clients should continue to expand their account budgets with CDLX.
Since this post was made, Cardlytics reported another quarter, revenue surging even more, 63% to $56.4 million. They also signed a contract with Wells Fargo. Regarding ARPU, they had the following to say:
Our third quarter 2019 ARPU was $0.44, down approximately 24% from $0.58 in the third quarter of 2018 but up 10% from $0.40 in the second quarter of 2019. As expected, our year-over-year ARPU decline primarily reflects the impact of rapid growth in our average FI MAUs. We expect this dynamic to play out for the near-term and continue with the growth in our FI MAUs that will come from the Wells Fargo rollout.
So their MAU… is that Monthly Average Users? So they signed JPM and will soon have Wells Fargo. These new deals apparently reduce their ARPU (average revenue per user?)
They had the following to say:
As the Wells Fargo launch nears completion in the first half of next year, FI MAUs will surpass $150 million, which we believe will roughly equate to one out of every two card swipes in the US. This represents significant scale. This is on par with the other major advertising platforms in the US.
So they have half of the card swipes under their… platform. Is there any indication what “normalized” ARPU should be? Are their competitors that would prevent them from obtaining the other 1/2 of all card swipes?