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Cardlytics IPO: Good Stock, Not Good Time

|About: Frank's International N.V. (FI)
Summary

Cardlytics Inc. has filed for a small IPO which will raise $76 million.

Cardlytics is unprofitable, but has made progress in lowering net loss and total debt.

This company is growing, has a clear niche, and thus would be a good investment.

Cardlytics Inc. has released more details about its upcoming IPO in a few weeks. NASDAQ reported last week that Cardlytics intends to raise $76 million by selling 5.4 million shares at a price range of $13 to $15. Cardlytics would command a fully diluted market value of just $285 million at the midpoint range.

Cardlytics has not announced a specific date for the IPO, and the recent turmoil in the stock market may cause a delay. But while this IPO is small, the fact that it is the first true tech IPO of the year means that it may be a weathervane for other tech companies, like Spotify, looking to go public this year. In fact, some of the trends surrounding Cardlytics could signify a change in how investors treat tech IPOs, as financial stability becomes just as important as growth.

A Solid Business Approach

There are two levels to Cardlytics’ business. On the first level, Cardlytics works with financial institutions (FI) to help run their rewards programs. Cardlytics boasts in its SEC report that “as of September 30, 2017, we were a partner to 2,041 FIs, including Bank of America, National Association, or Bank of America; PNC Bank, National Association; Lloyds TSB Bank plc, or Lloyds; and Santander UK plc.”

On the second level, Cardlytics obtains data on customer purchases by doing business in Colorado and shares it with marketers through their Cardlytics Direct advertising channel. Marketers know what customers are purchasing on their own websites, but they do not know what customers are purchasing in general. By sharing that information, Cardlytics helps marketers reach out to a wider variety of customers. Cardlytics derives nearly all their revenue from selling to marketers, as it states that 92% of its revenue in the nine months ending September 30, 2017 came from Cardlytics Direct sales.

There are a few things to note. While Cardlytics may boast about being partners with over 2,000 FIs, it is in fact substantially dependent on Bank of America (NYSE:BAC). About half of Cardlytics’ monthly active users come from Bank of America, with another 10 percent coming from Lloyds. Furthermore, Cardlytics only has a direct contractual relationship with 17 of those 2,041 partners. The others become part of Cardlytics’ network through digital banking providers, and make up about only 10 percent of Cardlytics’ monthly active users.

Consequently, investing in Cardlytics does entail being confident in Bank of America’s future prospects. Bank of America has been hit by the recent stock market tumble, but had seen its stock rise by over 40 percent in the past 12 months and had a decent earnings report a few weeks ago. At the very least, Cardlytics’ dependency on Bank of America is not a serious concern.

Not Just Growth

Like most tech IPOs, Cardlytics is growing yet unprofitable. It reported a revenue of $91 million in the nine months ending September 30, 2017 compared to $76 million in the same timeframe in 2016.

But what is good is that while Cardlytics is unprofitable, it is making a real effort to lower its debt, increase net income, and not talk about how future growth will make up for everything. Cardlytics’ net loss in the aforementioned 2017 timeframe was $15 million compared to $68 million in 2016. Furthermore, Cardlytics’ total debt was $55 million on September 30, 2017 compared to $111 million at the end of 2016.

The company has sacrificed some of its growth potential to cut back on its debt, such as laying off 15 percent of its workforce in 2016. However, I like its commitment towards showing that it actually hopes to be profitable and it still has plenty of room to grow. Cardlytics will begin partnering with Wells Fargo later in 2018, and can continue to further integrate with its partners with which it has limited contact. And as marketing firms look for more data and the next big strategy, Cardlytics’ ability to offer comprehensive information on customer purchases will keep it attractive.

Why Go Public Now

The recent stock market tumble may cause Cardlytics to decide to hold off on its IPO for the moment, but there are better reasons for Cardlytics to strike now rather than later. By moving quickly, Cardlytics can attract interest from investors by being the first tech company to go public, especially if other tech companies end up delaying their IPOs.

Even if Cardlytics chooses to wait, investors should still consider giving this rising tech company a chance. Cardlytics has a successful growth history, a clear commitment towards becoming profitable, and owns a niche which will attract interest from FIs and marketers. The first tech IPO could very well be a true success.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.