Why Large Option Traders Are Targeting Criteo S.A. | Why Large Options Traders Are Targeting Criteo S.A.
Why Large Option Traders Are Targeting Criteo S.A.
Around 2 P.M. EST on February 18th, someone purchased 2,500 Criteo S.A. (CRTO) March $45 calls for $1.82-$1.90 each. The $450K+ bet led to call activity being 16x the average daily volume and the call to put ratio was 8:1. Following this action there was another 1,500 bought for $1.85-$2.10 the very next day. This unusual options activity begs the question, why would he/she be making such an aggressive bet over the next month of trading?
To start off Criteo reported Q4 EPS of EUR 0.37 per share vs the Wall Street consensus estimate of EUR 0.24 per share on revenue of EUR 96M vs the EUR 90.7M estimate (74.5% year over year growth) early that morning on the 18th. They issued Q1 revenue guidance of EUR 96M-99M and FY15 guidance of EUR 433M-440M. Both of these numbers topped estimates for EUR 87.77M and EUR 400.09M. The $2.65B advertising tech firm based in France added another 700 clients in the fourth quarter to bring their total above 7,000. Cash and cash equivalents stood at EUR 289.75M compared to EUR 234.34M at the end of 2013.
For FY14, adjusted EBITDA was up 154% to EUR 79M, positive free cash jumped 5-fold to EUR 30M, net income soared to EUR 35M from EUR 1M, and total revenue ex-TAC (traffic acquisition costs) rose 70% to EUR 304.65M. By breaking down revenue ex-TAC we can see all three major segments experienced tremendous growth, but the Americas led the way. Americas, the second largest segment, had an annual increase of 88.4% to EUR 89.86M. EMEA had a respectable gain of 59.3% to EUR 155.12M and Asia-Pacific picked up 72.9% in 2014 to EUR 58.67M.
Valuation
Criteo shares appear rich when you look at 2015 numbers, but this is not the case when you take into account the expected growth next year. CRTO trades at a P/E ratio of 32.11x (FY16 estimates) with 40.4% EPS growth (PEG ratio of 0.79x), price to sales ratio of 3.61x, and a price to book ratio of 7.46x. Revenue growth is forecast to come in at 42%+ this year and nearly 27% in 2016 to just under EUR 550M.
Wall Street analysts are on board for more gains to come in the stock, as two firms upped their price targets after the Q4 results were released. Deutsche Bank (DB) raised their target to $54 from $44 and Jefferies Group increased their target to $65 from $60 (both have buy ratings).
Technical Analysis
Looking at the 6-month daily chart above we can see that CRTO shares have been able to sustain a move above the recent trading range for the past few trading sessions. MACD and the ADX line (w/+DI and -DI) are confirming the bullish price action that is occurring on heavy volume. Shares are now setting up for a measured move to $50+ later this year ($43.38-$36.65=$6.73+$43.38=$50.11).
Criteo is at the forefront of the explosion in mobile advertising and has actually been one of the few to turn a profit at it. The company has done so through their multi-screen marketing product and predictive technology that determines the odds of a user clicking on an ad and if they buy the featured service or product. The launch of Facebook’s (FB) new product ads became a great new tool for Criteo to benefit advertising clients in their campaigns to reach multiple devices for the various products and services. Currently 80% of the company’s clients use the multi-screen marketing product.
In a way to expand the potential client reach of the company, Criteo recently announced the acquisition of DataPop, a Los Angeles-based advertising company that specializes in bringing a product catalog into online ads for the customer, for an undisclosed amount. Management is expecting a EUR 2M impact in the coming quarter. The EUR 55M build up in cash in the last four quarters leaves more room for Criteo to deploy their capital in other M&A targets.
Over the course of the last couple of years, internet users using a mobile device have eclipsed desktop users, proving that is not a fade, but instead a trend that could last for several generations. It is also not just a transition from ditching the laptop for an iPhone either as the vast majority are using a smart phone and a desktop/laptop in their daily lives. Tablets, game consoles such as the Xbox and PlayStation, and “smart” products (smart TV, smart watch, etc) are other ways consumers across the world are using various devices to browse the internet as well. The growing trend of more and more options makes Criteo’s multi-screen marketing focus (combined with Facebook) the right plan for maximizing client dollars and profitability.
Going out a year from now it is not a stretch for shares to be trading at $55-$57 (forward PEG ratio of 1x) as the company grows revenue in the high double digit range in all major areas of the world (beat EPS estimates every quarter since going public) and brings in 100’s of new clients each quarter. That said the big call buyers in the March expiration are likely taking a bullish position based on recent performance in the underlying business, growth potential in mobile usage, and the breakout to multi-month highs (highlighted in the chart above) in the stock.
If you are looking to take a bullish position in CRTO, it is probably best to trade it via March/April $45 calls or $45/$50 call spreads for a favorable reward/risk ratio. This mitigates risk to the premium paid for the options in the event of a broad based sell off in the tech sector in the near-term. The next catalysts for Criteo are the Pacific Crest Annual Emerging Technology Summit and the Morgan Stanley Technology, Media & Telecom Conference (both on March 3rd). Depending on what Benoit Fouilland, the CFO, presents at these tech conferences, could mean a sizable swing in the stock price in the next month. March options are currently pricing in a $4.25 move, or 9.52%, in either direction through March 20th (all options data is courtesy of LiveVolPro.com).
