The Bogeyman
For me, he lived near the bottom of my bed, so I slept with my feet tucked up. For one of my kids, he lurks in the closet, but only if the door is open a crack. For a lot of other kids, he's under the bed or maybe in the weird pitchy shadows in the corners of their rooms at night.
The bogeyman.
Really he only lived in my head. Maybe it's an adaptive relic to keep us from getting eaten by a lion on the savannah. If you think you saw something move at night, best not to investigate whether it is or isn't a lion — just flee to safety. If it is a lion, you're safe. If it's not a lion, you're safe too.
Now, though, he just keeps you from getting a good night sleep. It's never a lion in your room. It's never the bogeyman.
Investors are people too. And they have this same wiring. They have the same fear of the bogeyman and the same need to put that fear into something out there in the real world. Sometimes, when you look at those fears in the light of day — or put actual numbers to those risks — they look overdone.
Working in the shadows
For AdTech Co. Criteo, the bogeyman is "cookie deprecation."
Criteo serves ads to folks browsing the internet. Their secret sauce was to work out how to show you products that you looked at closely but didn't buy.
You navigate to nike.com. You look at a pair of AF1s. You don't buy them. Then, later, you're on economist.com and the banner ad shows you the exact pair you had been looking at. You pull up a recipe for taco Tuesday on a random cooking blog. The AF1s popup in the ads again. You look for a hike for the weekend on the National Forest Service website. AF1s, again. This is Criteo. It’s a very effective strategy for advertisers.
Privacy advocates don't like it. It's based on cookies — digital crumbs of information that tell websites who you are. Privacy groups, regulators, tech companies have been trying to get rid of them for years.
If you get rid of these cookies, investors fear CRTO bites the dust.
The disappearance of cookies — cookie deprecation — is CRTO's bogeyman.
Cookie deprecation sneaks closer every day. It's inevitable. Investors see the final shoe dropping when Google chucks its cookies. It's delayed the date a few times and just delayed again. Two thirds of all internet traffic travels through Chrome, so when Google drops cookies, CRTO goes too, right? Right?
What would actually happen to the company if cookies went away today?
Less than half of CRTO's business today comes from that legacy business. The company, management and shareholders all hold a keen interest in self-preservation. The operating team found other paths to make money serving ads, ones that don't rely on cookies. These have expanded rapidly and overtook the cookie side of the business last year.
Now, only about half of its legacy business comes from Chrome. Management already has in place solutions for advertisers to replace this.
Apple/Safari advertisers have been using alternatives since 2017. Firefox advertisers have been using them since 2019. The company expects to keep about 60% of its business from advertisers who use cookies on Chrome today to run their ads.
Shed some light on it
So, if cookies had dropped from Chrome at the beginning of 2024, how much profit would CRTO have lost?
Profit would have grown 30% in Q1. Hmm. That doesn't seem so bad.
2023 was a dim year for advertising. There were other things going on that make the comparison an easy one. But the point is that Google and Chrome and cookies going away loom so large in investors heads that they've overshadowed the resilience and successes of the company over the past few years. Investors place little value on the future of CRTO.
There are plenty of risks that could knock CRTO's business around — another advertising winter, pandemics and things — including cookie deprecation. But once you shine some light on it, CRTO's bogeyman doesn't look so scary after all. The company has adapted to thrive without them, once they're off the plate, investors should come to appreciate the enduring value of the business.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.