“If you're not paying for the product, then you are the product” - The Social Dilemma: Cardlytics $CDLX

The Revenge of Cathie Wood?

Hello and welcome back to “The Revenge of Cathie Wood” where I am exploring small cap tech companies in the off chance that the commodity supercycle has a few more years of delay before we can all retire on our coal, oil, gold, copper, and uranium stocks.

The business on the chopping block today is Cardlytics (CDLX), and they are an advertising platform that operates from within bank mobile apps.  On the one hand, it is very interesting to get out from under the Google advertising monopoly, but on the other hand, my Gen X attitudes are somewhat uncomfortable with the privacy ramifications of a business that mines your banking data in order to tailor specific advertisements to you.  Whenever I would ask my Zoomer students about this aspect of the modern tech world, they were, for the most part, completely comfortable with the absence of privacy in exchange for free services.  Maybe I should just own the dystopia.

I am not John Kenneth Galbraith on a crusade against advertising, society is filled with knowledge asymmetries, and when I find a clever and entertaining ad, I even enjoy it.  In fact, this idea came to me from

Alejandro Yela

of

The Hermit

, who asked me if I could advertise his substack after he nailed a three bagger in The Children’s Place (PLCE).  Good job Alejandro, and I do like your mascot.  

As a tech company Cardlytics is in a bit of an odd place at the moment.  Due to their head start, they are the current market leader for managing bank card rewards programs within mobile apps in the US and the UK, however, they hadn’t done a major technology upgrade for about ten years until the demand from clients hit a crisis level.  At the moment, CDLX has developed the technology for managing their advertisement platform on the AWS cloud and enabled the ability for advertisers to pay per click through, as is the standard in the advertising business currently, but the rollout across the platform so far has only reached 10% of clients, and management is guiding for 100% by the end of 2025.  This should eventually cement their position as market leader, and allow for a higher ad spend through their platform as advertisers can more easily monitor outcomes of campaigns.

CDLX is also managing the loss of their CEO, Karim Temsamani, who was hired away to Palo Alto Networks, and they transitioned to a new CEO by promoting from within the COO, Amit Gupta, for maintaining business continuity.  It isn’t clear if business continuity is a good thing, as Cardlytics did not achieve their vision under past management.

Revenue growth appears subdued, causing concern from investors and leading to a dramatic decline in stock price.  However, it is important to note that advertising spend has been down ever since Jerome Powell raised benchmark interest rates from 0.3% to 5.3% in the largest relative interest rate increase in recorded history.  Total US ad spend in 2022 was $364.4 billion, and in 2023 it declined to $364.2 billion despite inflation at elevated levels.  In 2024 total ad spend in the US is projected to be $373 billion, a 2.3% increase over 2022.  Given the anemic growth in total ad spend, and CDLX’s upgrade rollout cycle, their revenues don’t seem at crisis levels to me, but when growth companies aren’t growing their multiples are shrinking.

The behavior of the stock price compared to the revenue is indicative of a growth trap collapse, however, there is a strong probability that growth will return.

Not only will the new technology rollout drive increased revenue growth going forward, CDLX’s sales team just landed the account for American Express which could increase revenues by as much as 30%, but probably not until 2025.  For 2024 management is not guiding for much growth at all.  

Quite frankly, I am humbled by how many analysts have covered Cardlytics over the years. The volume of analysis is overwhelming, and proportional to the size of the opportunity if CDLX executes on their opportunity.  And all of those analysts have suffered this traumatic price drawdown, but in fairness, it is very likely due for at least a short term bounce if not a total reversal of momentum.  Perhaps the most poignant analysis of CDLX comes from the hedge fund manager who just spent $14 million increasing his stake to over 13% of the company, Cliff Sosin:

Schadenfreude aside, Sosin had been buying Cardlytics at prices 30x higher than the current share price of $3.67.  Sosin’s fund owns over 13% of CDLX at an average price of $43.65, a 91% drawdown to this point.  If CDLX is successful in monopolizing the banking card data market and converting to profitability, extremely high revenues and multiples are possible.  They already have market share on 50% of all banking transactions that take place in the United States, that has to be worth much more than the current market capitalization of $182 million.  As in all tech companies, the executives have been selling all the way down.

Looking at the balance sheet, after a recent bout of dilution, CDLX has about $70 million in cash, and is almost at breakeven.  It is not clear that they will need any more dilution, but that is always the risk in tech. There is also the risk of value destructive M&A, the past CEO engaged in three acquisitions which provided new technologies which are slowly being integrated into the platform, but have yet to have any effect on the financial statements.  It is feasible that the dilution, aside from executive compensation, is behind them, but not guaranteed.  Management gave no guidance.

Looking forward to catalysts, with the addition of American Express, CDLX’s monthly active users is about to increase substantially.  And with the rollout of their new platform, so should revenue per user, but probably not in time for Q3 earnings.  My best guess is that Q4 earnings should demonstrate to the market that Cardlytics has growth again, and therefore can fetch a multiple much higher than their current 0.54x sales. 

The absurd valuations from the past probably won’t return unless the market believes once again in the narrative that Cardlytics can become a big moat monopolist of a critical advertising platform.  Gradually, under the surface, changes have been taking place to make that monopoly position more likely.  More and more banking is migrating to mobile, and more and more advertisers are receiving diminishing returns from Google and Meta’s platforms.  Banks receive so much value in increasing the stickiness of their customers that they are likely to be negotiated down to a better revenue share allowing CDLX to increase their margins as well.

The only missing piece of the puzzle that would make me more enthusiastic would be the presence of an entrepreneurial founder.  The new CEO is either untested, or partially responsible for the malaise under the previous regime.  The market opportunity is enormous, but past management was asleep at the wheel allowing the technology to fall behind advertising standards.     

Aside from a six month pop on the imminent American Express catalyst, if I wanted to drink the Kool Aid and hold CDLX for the longer term, what kind of valuation could it ultimately fetch?  It isn’t unreasonable that with increasing market share, utilization, and margins, CDLX could grow to have several billion in revenue, with 30% to 40% EBITDA margins.  The strength of the moat with the hard fought banking relationships could allow for price to earnings ratios as high as 15x to 20x.  If the Cardlytics bulls are correct, a ten year fifty bagger is a possibility.  The only other company I have analyzed with a genuine chance to be a fifty bagger is Opendoor (OPEN). If the imminent catalyst works as anticipated, a six month five bagger is probable.  Take a listen to that podcast interview with Cliff Sosin who is down 91% on his $250 million investment and see if he sells you on the narrative of Cardlytics.