Waffles

Businesses die all the time. Lamplighter talked about some of those dinosaurs here. You'd expect that from ancient businesses. They traded in calling cards and wire transfers. These things existed all the way back in the late nineteen hundreds!

But extinction can happen much faster than that.

Google could add your solution that you've spent years building as a feature and give it away. Or—it could erase the foundation for your business entirely.

Death by cookies

Criteo provides advertisers technology that targets ads through browser cookies. In 2020, Google announced that it would kill browser cookies. Apple made those plans back in 2017. It followed through and killed them on Safari in 2020. The death of cookies has been a challenge for Criteo.

By 2017, when Apple announced its plans, Criteo had already been cooking something new.

It applied the same cleverness that made it a leader in third-party cookie-based advertising to crack open a new market. It would serve ads but use data from retailers’ own databases rather than cookies. This was a much harder nut to crack and involved more than one piece of data—like a cookie—to serve the right ads.

Amazon has been making hay doing this on amazon.com since 2012. It’s been a wild success. Using its own data, it’s able to serve much more targeted ads to shoppers. This means much better returns on advertising spending for sellers. Amazon advertising brought in $56 billion(!) last year and grew faster than any of Amazon's other businesses. About 20%.

Criteo's angle is to do this, but for the rest of the internet. Retailers are reluctant to sign up Amazon—a competitor—to do it for them. It’s expensive to do in-house. Walmart has a team of nearly 1,000 on the project. Criteo's solution gives retailers another line of revenue. It gives advertisers another lane to reach consumers. It gives both reach to the far ends of the internet.

Help wanted

But the cookie business remains a drag. Its still a cash cow and also still haunted by the death of cookies. Lots of businesses look for ways to solve the innovators dilemma. They look for ways to avoid being disrupted. Sometimes they make splashy acquisitions. Sometimes they take on ill-conceived ventures. Sometimes, though, they take cues from customers and actually develop something valuable. It’s not that common, but when it works, it can create enough confusion that it provides an opportunity for investors.

Sometimes new investors recognize an opportunity and pounce on it. Other times a successful new venture of an old business goes unappreciated. If the new venture is funded by the old business, there’s no natural swap of new investors for old. Old investors sometimes keep their focus on that old business. This keeps a lid on their expectations and on share price. This is the case for Criteo.

Delicious waffles

Google waffled on its decision to kill cookies. In July last year, Google said "just kidding" it wouldn't kill cookies. The risk investors feared most disappeared. Criteo shares jumped 10%.

You can see how investors have been hung-up on the old business. When Criteo held its "Retail Media" day—where it touted the vast opportunity and strong traction of this business, shares fell 1%. When it announced Microsoft(!) as a cornerstone customer for this service, shares barely moved.

Then it reported earnings. The retail media business notched 26% growth. In fact, it’s been growing 20+% for the past couple of years. That's better than Amazon's advert business. The economics of Criteo's business are good too. 20% growth very quickly shows up in profit. Earnings expanded 66%. Investors noticed. Shares jumped 18%.

But you, being an observant investor, surely noticed profit still growing faster than share price. Criteo’s pivot to retail media looks like it has legs. It already represents about a quarter of the operation. The business is still cheap overall—cheaper relative to earnings than when Lamplighter first pointed out the company. And it’s not priced at all for a business with a long and bright future.

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.