Valuing Cardlytics based on personal data, conservative data, current market cap, and under realistic assumptions. Updated assumptions, and new scenarios (compared to last post)*.
For all my notes on CDLX, check out my Qualitative and Quantitative “Research Notes”:
*Please note, the updates here are from using the updated MAUs from Q1 2021 earnings, where reported MAUs increased from 163M to 168M. Compared to the Substack article, there are no significant differences beyond updated MAUs. Compared to the previous blog post, there are additional, more in depth intrinsic value calculations.
Current Market Cap as of 5.5.2021: $110/Share x 31.8M Shares ~ $3.5B Market Cap.
Simple Thesis
As a more unique way of valuing Cardlytics, I started by taking the average redemption, or consumer incentives (CI), between my friends and family that are eligible, and redeemed within the last 1 year. This was an average of $24.3. Average of $75, $72, $9, $8, $3, $3, $0 = $24.3. (This is a small sample size, and therefore more intrinsic value calculations are done below. Please also reference the end of the video below, where I discuss this idea in more detail). I will assume that within 5 - 10 years, all MAUs will have an average annual redemption of $24.3.
x$2.16 of Revenue per CI = $52.5 of average revenue per monthly active user (ARPU)
x168M MAU = $8.8B total revenue
x36% gross profit margin = $3.2B gross profit
-$200M in OpEx & 21% Tax = $2.3B cash flow
x20 CF multiple = $47B.
(Assumptions are listed further down below)
For reference, $52.5 of ARPU seems reasonable to obtain in the next 5-10 years, in comparison to other mature digital advertising platforms. In addition, as travel and luxury offers increase on the platform, as more offers are added, and as awareness increases (Cardlytics has waited to send more notifications to MAUs until enough offers or relevant offers are on the platform), one could expect that ARPU would increase from current levels to something more in line with the larger digital advertising market, especially with regards to the advantages of this platform in relation to others discussed in the write-up and video.
Conservative Value
Beyond ignoring growth in monthly active users (MAU) and ignoring more redeemed offers as more ads come onto the platform, I will assume average redemption or CI is 25% of the average $24.3 listed above, still within the next 5-10 years.
This leads to an average redemption or CI of $6/year.
This can either be viewed as assuming there is a larger portion of the MAU base that will not use offers or contribute $0 of ARPU. Or, this could be more looked at as a way to bring ARPU more in line with ARPU earned on the lower end of the digital advertising market.
Using the same assumptions and numbers above, results in an approximate market cap of $9B.
Worst Case Scenario
Probability of bankruptcy is low given current levels of debt are minimal.
Probability of equity value becoming worthless is low, as long as CDLX maintains the rights towards advertising on 160M+ users through the bank channel. That is a large advertising base, that is worth something in of itself. It is not worth $0, but nor is it worth the current market cap of $4.5B without producing advertising revenue.
Overall, probability of $0 value is low, but not non-zero.
Current Scenario / Current Market Value
Reversing it based on the current market cap (approx. $3.5B), essentially a reverse DCF, keeping all assumptions, backs you into an average redemption of $3.23/MAU.
Assuming users on average are redeeming a 10% offer, on a $10 item, this is less than 1 offer redeemed per quarter.
Therefore, this situation currently has a possibly protected downside, with a good potential upside.
Assumptions
$2.16 of revenue per $1 of consumer incentive (CI) is based on the average of the last 3 years of numbers within the 2020 10-K. This number includes numbers under both pricing models of Cost per Served Sale (CPS) and Cost per Redemption (CPR). Given that the CI reported in the 10-K is likely only the CI that Cardlytics was required to pay under the CPS model, and therefore does not include CI paid by marketers directly under the CPR model, it may be more appropriate when basing figures off of CI, to either assume all CI is under the CPS model (and therefore matches the 10-K), or to be more conservative and assume that it is under both CPS and CPR but then take a portion of that total (to adjust it to match the 10-K) and still use the $2.16 figure. This second method of calculation is done below.
168M MAUs is based on current 2021 company data.
36% gross profit margins are from the average of the last 3 years.
$200M OpEx (operating expenses) is based on the last 3 years, with an added margin due to the assumed increase in expenses from the recently acquired companies (Dosh + Bridg). This expense will grow over time but will remain generally fixed in relation to growing revenue, and therefore provides operating leverage.
21% tax rate (could very well increase over time).
$6.5M of CapEx (capital expenditures) is based on the average of the last 3 years, which is approximately equal to the average depreciation and amortization of $5.2M over the last 3 years, so these have been cancelled out and ignored, especially in light of their size in relation to revenue.
20x CF multiple can be looked at as a modest multiple that investors may be willing to pay for a mature CF generating business with growth potential. Also, could be thought of as the present value of all future cash flows, discounted at the risk-free rate plus an equity risk premium and growth factored in. Assuming an average future 30-year treasury rate of 5%, an equity risk premium of 3% once stabilized and mature, and a growth rate of 3%, PV = CF / (i-g) = CF / (5% + 3% - 3%) = CF / (5%) = 20x CF.
More Realistic Value, Changing Assumptions
If you keep all the assumptions the same but believe in the next 5-10 years MAUs will grow from more banks and financial institutions using Cardlytics or Dosh, and from the gradual increase in users of digital banking, 200M MAU seems reasonable.
Also, if investors would pay a multiple similar to other companies whose primary source of revenue is from digital ads, a 20x cash flow multiple is fairly low, especially given the length of the future runway. Therefore, more realistically one could assume 30x FCF would be paid by investors.
The average redemption, or consumer incentives (CI) = $24.3.
x$2.16 of Revenue per CI = $52.5
x200M MAU = $10.5B
x36% gross profit margin = $3.8B
-$200M in OpEx & 21% Tax = $2.8B
x30 CF multiple = $85B.
More Realistic Value, Changing Assumptions, CPS vs CPR Pricing Model
Cardlytics has two primary pricing models, Cost per Served Sale (CPS), and Cost per Redemption (CPR). Under CPS, Cardlytics is paid regardless if the consumer redeems the offer when completing their sale, but under CPR, Cardlytics is paid a separate fee, and only when the offer is redeemed. Therefore, it may not be appropriate to assume the full $2.16 of revenue per $1 of consumer incentive, since this assumes all consumer incentives are from what Cardlytics pays under CPS. Therefore, it may be more appropriate to assume that the consumer incentives we are using is for the total amount redeemed by MAUs under both CPS and CPR, and to match Cardlytics 10-K, we need to make an assumption of the portion of consumer incentives that is paid by Cardlytics under CPS. If we assume that is 70%, since CPS is Cardlytics primary revenue model, and keep the assumptions the same:
The average redemption, or consumer incentives (CI) = $24.3 * 70% = $17
x$2.16 of Revenue per CI = $36.7
x200M MAU = $7.35B
x36% gross profit margin = $2.65B
-$200M in OpEx & 21% Tax = $1.93B
x30 CF multiple = $58B.
Value Based on Percentage of Total US Digital Ad Spend
If total US digital ad spend was $200B within the next 10 years (excluding political ads), and Cardlytics earned 2.5% of that as billings, that equals $5B worth of billings, and approximately $3.35B in ad revenue.
x36% gross profit margin = $1.206B
-$200M in OpEx & 21% Tax = $795M
x30 CF multiple = $24B.
This ignores international revenue.
Average Intrinsic Value
If we take the average of these scenarios, or said differently, we found the expected intrinsic value and assumed equal likelihood of each occurring, and we ignored the $0 scenario (addressed immediately below), we would have an expected intrinsic value of $45B (average of $47B, $9B, $85B, $58B, $24B, or 20% probability of each scenario occurring).
However, even if you assumed a 75% likelihood of the company being worth $0, and a 25% chance for the other scenarios (5% each), the expected value would be $11B, which is still above today’s market price.
Biggest Risk
If new advertisers do not join the platform and add additional offers to the mix, you will not have enough applicable offers to push awareness and use by MAUs. Users have no incentive to use offers that do not appeal to them or are not applicable to them. Without more marketers advertising on the platform, revenue will stay flat or decline, decreasing the value of the company.
Catalysts
American Express (AmEx) joining the Cardlytics platform (low probability for now, given the time they have spent developing and using there own platform, there work around personalization and Orchestra, etc) is one catalyst towards closing the gap between current price and intrinsic value. AmEx would join out of the need to be a part of larger scale, to get access to more marketers that require the additional advertising base to make it worth it to advertise. AmEx would want this, as it adds more revenue than they would be earning on their own, even if their retained portion of revenue is lower.
Another catalyst is the self-service platform put in the hands of more advertisers, including SMBs, leading to more ads, more MAU usage, more revenue, more CF, and then higher value assigned by the market.
More Detail
Write-up is free to read via Substack. The write-up is formatted in bullets to more quickly skim and read sections of interest.
Also discussed via YouTube.
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 content is intended for informational purposes. Before making any investment, you should do your own analysis. Please see the Disclaimer page for more details.
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