In my original thesis, "Cardlytics: A Prime Opportunity In The Digital Advertising Boom," I talked about the company's push in the digital advertising space and why I thought Cardlytics' (NASDAQ:CDLX) competitive edge over traditional online advertisers will push it to new highs both in revenues and in share price.
Since then, the company had outperformed my expectations and has consistently reported higher-than-expected sales based on new partnerships with big banks. It originally rolled out its partnership with Bank of America (BAC), which made up most the company's revenues, but has since added JPMorgan Chase (JPM) and is in the process of rolling out its Wells Fargo (WFC) partnership, which will further increase its market penetration.
The company uses the data it purchases from thousands of financial institutions and analyzes tens of billions of transactions to cater advertisements based off purchasing patterns. This has resulted in a $30:1 return on ad spend for its customers, as this targeting is done on an individual basis rather than grouping people together based of other trends like Facebook (FB) and Alphabet's Google (GOOG, GOOGL) do.
The company is clearly an advertising success story, and its edge over competitors should sustain its business model for the upcoming years, but there are headwinds and profitability issues which need to be reviewed to determine if the current share price is fair valued or overextended.
The company uses its Cardlytics Direct platform to analyze over $1.5 trillion worth of transactions in credit, debit, ACH and bill pay, and then constructs a spending habit profile on customers in exchange for cashback incentives. The company paid over $74 million in customer incentives in the first nine months of 2019, up from $46 million in the first nine months of 2018.
Up until the last few quarters, Cardlytics generated around 70% of its revenues from Bank of America, which was an early partner with the company's platform. Since then, Chase has taken a sizable 40% share of revenues for the company, and Bank of America's contribution is down to 38%. Throughout the next few weeks, the company is set to roll out its Wells Fargo partnership, which will further diversify its revenues streams and increase sales totals significantly, as the bank is one of the largest consumer banks in the US.
Given the fact that over 70% of all in-store transactions now occur on credit cards and online, the company's platform is second to none in evaluating purchasing patters on an individual scale, but also on a larger network scale, which it can begin selling to consumer companies who want to know the best way to approach their competitors. Cardlytics currently offers its solutions to around 50% of the top retail stores, 75% of telecommunications companies and 80% of top restaurants in the United States.
In 2019, the company saw a large jump across nearly all metrics as it rolled out its Chase partnership and, in some cases, increased the workload with existing ones. Its financial institution MAU (monthly active users) increased 116% to 128.3 million, which did result in a 24% decrease in the average revenue per user to $0.44, as presumably not all new users opted in to the company's services.
After reporting record-breaking revenues in the 2018, analysts now expect the company to report $200.35 million in sales for 2019, a 33% increase from the year prior. For 2020, they expect a further 32.4% jump to $265.28 million, reflecting the expected contribution from the new Wells Fargo partnership.
It is noteworthy that when the company has exceeded previous expectations set by the same analysts when it announced the new Chase partnership, and this will likely be the case again with Wells Fargo. It is unclear at this time how either bank compared to the other when it comes to reaching out to their customers to offer these incentives in exchange for their data.
When it comes to profitability, the company is in an improving but uncertain situation. Given its customer incentive program, Cardlytics did not report any serious profits thus far, and is expected to report a loss per share of ($0.35) for 2019 even with record-breaking revenues and lower research & development costs. It is notable that marketing and SG&A expenses were higher than last year, reflecting the company's push to not only gain users but also increase its MAUs to then push revenues per user up from ~$0.44 back to where they were last year.
For 2020, analysts expect Cardlytics' loss per share to decrease substantially to ($0.05), reflecting the aforementioned possibility of the company outperforming expectations when it comes to the Wells Fargo roll out.
Cardlytics' business model is sustainable, as it holds $95 million in cash and equivalents and has paid down all of its long-term debt. This leaves the company to focus all of its efforts on growing active users from its FI customer base and grow the average revenue per user as it launches new targeting initiatives.
Given the fact that the average online advertiser offers a return on ad spend of $2.9:1 and Cardlytics Direct offers one of $30:1, the company is very likely to continue doing large-volume transactions with its partner financial institutions and has the ability to use that data to increase its partnerships with retail businesses around the country.
Similarly, it does have the opportunity to launch an international platform and expand into European countries where these types of platforms are not used as much or don't have a high degree of reliability and success with advertisers. Asia is another possibility, even though transparency is a hot-button issue in the region and local players have large-scale access to develop their own platforms and systems.
All in all, I remain bullish on the company's year ahead, and given the fact that it is currently trading 50% higher than my $1 billion market cap price target, I am revising my target to a market cap of $1.68 billion, or around $64.00 per share. This represents a roughly 12% increase from current price over the remaining months of 2019 and 2020.
I expect Cardlytics will, in the future, take on more financial institutions to its platform and grow active users and also branch out to offer its high ROAs to other retail companies and brands. This should continue to drive the sustainability of the ~30% annual revenue growth rate for the next few years and move the company into profitability in 2020 or 2021.
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Disclosure: I am/we are long CDLX, WFC, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Opinion, not investment advice.