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Cardlytics ($CDLX) Current Thoughts Following Price Decline (5.17.2021)

Given the recent price decline of Cardlytics, I wanted to think through and post my current thoughts regarding this potential investment.


This was first published on Substack on 5.17.2021 and discussed on YouTube on 5.18.2021. Republishing on my website as a backup.



For all my notes on CDLX, check out my Qualitative and Quantitative “Research Notes”:


Current Market Cap as of 5.17.2021: $91/Share x 31.8M Shares ~ $2.9B Market Cap.



With the recent stock price decline of Cardlytics, I wanted to think through possible explanations for the decline, and judge whether there was any reason to be concerned.


Potential Scare from Loss of Airbnb

At last quarter’s earnings, the updated investor presentation had Airbnb removed from the list of advertisers. From other investors, it sounds as if Airbnb did not like using the Cost Per Served Sale (CPS) pricing model. The reason was due to them not knowing whether on a non-activated offer, if the final purchase made by the customer was from seeing the offer on Cardlytics, or from seeing another advertisement such as on Google or Facebook. They did not like this, since under CPS, Airbnb still has to pay Cardlytics for serving an offer where a purchase was made, regardless of whether the offer was activated.


The simple answer seems to be that Airbnb should use the Cost Per Redemption (CPR) pricing model, where they only pay based on offers activated and redeemed, not just served. However, it sounds like Airbnb did not understand this nuance between CPS and CPR, where they assumed for the duration of being an advertiser with Cardlytics that customers were required to activate the offer for Cardlytics to get paid, even under CPS. I do not have a direct source of that statement, but if true, and if due to actions from the management of Cardlytics, this may be something to monitor closely.


If we started to see more advertisers stop advertising on the platform, it would be of concern. Currently, I have not seen this, and instead have seen past advertisers continue to send offers, and new advertisers join the platform. Last quarter, CEO Lynne Laube mentioned how one advertiser left the platform last year, only to return after noticing their loss in share of customer spending.


Impact of Macroeconomic Factors

Explanations such as fear of increasing interest rates and inflation are ones mentioned by others to explain the recent price declines.


Both increasing interest rates and higher inflation are reasonable assumptions for the future, given the current historically lower interest rates in relation to historical averages, and given the fed's actions over the last year.


My previous assumption was to assume average long term interest rates would increase closer to the higher historical averages, for discounting purposes. I detailed out in the last write-up how if one assumes a long term average risk free rate of 5%, equity risk premium of 3% for a mature company in 10 years, and cash flow growth of 3%, we get a cash flow multiple of 20 ( 1 / ( 5% + 3% - 3%)). At the high end of our valuation calculations, I showed how CF of $2.8B was possible 5-10 years from now, giving a valuation of $56B under 20x CF. If the increase in interest rates assumed by other investors was actually much higher, say 8%, we get a CF multiple of 12.5 ( 1 / ( 8% + 3% - 3%)), cutting our valuation to $35B. Therefore, this may explain part of the decrease in valuations. However, due to the offsetting decline in prices, this still allows for the same payoff today, where before would of been a return of 12.4x ($56B/$4.5B), and now where today and under higher assumed interest rates it would be approximately the same return at 12.1x ($35B/$2.9B). In addition, given $35B is still considerable higher than today’s market cap, given most investors assume cash flow will not increase to the levels I assume, it allows for an attractive purchase prices. In addition, if interest rates do not increase to those high levels, it allows for even higher return payoffs at these lower stock prices.


In terms of inflation, I felt this would have a lesser impact on prices today, given talks regarding the threat of increasing inflation rates have been going on for a year, following the fed's actions during COVID. Therefore, this should not of been a surprise, unless on average, investors either wait for the facts to arise, or are very short term thinking, or both. Either way, Cardlytics should not be too adversely impacted by inflation, in comparison to other companies, such as those with high ongoing maintenance capital expenditures that will also increase due to inflation, and take away from any benefit in increase in revenue.


Previously Too High of Market Price

It may be true that stocks, including Cardlytics, were previously expensive in relation to current revenue, earnings, sales, etc. However, the value of a business is based on the future cash flows it generates. Even though the price of Cardlytics may of looked expensive while looking at current point-in-time statistics, the market price was cheap in relation to future expected cash flow. Even assigning a low probability to that outcome, yielded an expected value greater than the previous market cap.


Therefore, this sell off could be from the large portion of investors who are thinking and valuing based on short term numbers, which allows for opportunity for the long term investor.


Risk of Going to Zero

The probability of Cardlytics going to zero seems low, given the scale of 168M MAUs, making it an attractive platform for advertisers to use, combined with the transactional data for targeting purposes. Combine that with low levels of overall liabilities and debt, the probability of going to zero seems low, but not zero.


Current Market Cap

To get an idea of what the current market cap of $2.9B represents, I will back into the average consumer incentive (CI) per monthly active user (MAU).


I will assume the following:

  • $2.16 of Revenue per CI (where revenue is the average revenue per monthly active user, or ARPU)

  • 168M MAU

  • 36% gross profit margin

  • $200M in OpEx

  • 21% Tax

  • 20x CF multiple

  • (Additional info on these assumptions can be found in the last Substack write-up)

Reversing it based on the current market cap (approx. $2.9B), essentially a reverse DCF, using the assumptions from above, backs you into an average redemption of $2.94/MAU.


Assuming users on average are redeeming a 10% offer, on a $10 item, this is less than 1 offer redeemed per quarter.


Another way to put $2.94 of consumer incentive in perspective, is to look at my redeemed offers within the last 90 days. This data sample is very biased and skewed, but shows that it would be easy for one MAU, over the course of an entire year (compared to my last 3 months), to use a single offer, like Chili’s, and hit the $2.94.




Final Thoughts

If this current sell-off was not industry wide across most technology focused companies, this price decline would be more of a concern. Overall, it seems the facts remain the same, and the investment thesis is still intact. Therefore, the recent price decline widens the margin of safety, and improves the overall return potential for this investment under most scenarios.


Video

I discuss this topic in the following video:




Follow-Up

If you have any questions or push back on any of the above, please contact me. I would enjoy discussing more and getting to the correct answer.


-Austin Swanson (Swany407)


Twitter: @Swany407


Disclaimer: This is not investment advice. This content is intended for informational purposes. Before making any investment, you should do your own analysis. Please see the Disclaimer page for more details.


Explaining the Investment

If you are looking for more detail on this company and the investment thesis, I have created a write-up, which is free to read via Substack. The write-up is formatted in bullets to more quickly skim and read sections of interest.


I also discussed the investment on YouTube.




Additional Resources and Links


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