Cardlytics $CDLX Stock Pitch

Disclaimer: The ideas presented in this article are not intended as investment advice. The author holds a long position in $CDLX.

Investment Summary

• Cardlytics exclusively powers the cashback platforms for most US banks, giving them insight into 1 in 2 US purchase transactions which they use to deliver targeted offers to over 168M MAUs
• The new CEO derisked the business by refinancing its near-term debt maturities and brought the business to EBITDA-breakeven and is targeting positive FCF in H2’24
• Cardlytics recently announced a transformational deal with Amex which is likely to result in a significant growth and profitability inflection in 2025
• However, the stock trades at prices that do not reflect the impact of the Amex deal due to concerns over a transient and largely self-inflicted slowdown in revenue growth

Thesis

Cardlytics (NASDAQ: CDLX) is a small-cap digital advertising company that has built the third largest advertising platform in the US based on MAUs. Cardlytics has had a turbulent public market history, enduring a 98% peak-to-trough drawdown from February 2021 to March 2023 due to bankruptcy fears driven by deteriorating bank relationships, slow growth, and a series of expensive acquisitions that turned into near-write-offs.

However, Cardlytics is in the early innings of a turnaround under a new CEO, Karim Temsamani, who was hired in September 2022. He had a successful background at Google and Stripe, and has seen success over the past year in bringing the business to EBITDA-breakeven and improving the bank side of the advertising platform, which recently resulted in Amex joining Cardlytics’ network and strengthened relationships with current partners.

I believe the market underappreciates Cardlytics’ long-term earnings power and the ability of the recently announced Amex partnership to inflect earnings and growth at Cardlytics over the next 12 - 18 months. Cardlytics is currently trading at 8x 2025 EV/EBITDA based on conservative assumptions around the Amex deal, which I believe could drive >30% revenue growth in 2025 and >15% revenue growth thereafter. I expect >100% upside over the next 18 months as the Amex partnership is reflected in the numbers.

Business

Cardlytics provides targeted card-linked offers to a captive user base of 168M+ MAUs through its exclusive bank partnerships, including 7 of the 10 largest banks in the US. Cardlytics’ bank partners share anonymized transaction data with Cardlytics which is then used to target cash-back offers presented through an offer wall within the bank’s applications.

Cardlytics makes money by charging advertisers for the presentation of these cash-back offers (billings), of which it shares a portion with the bank via revenue share (~1/3 of billings), spends a portion to fund the cashback offers (~1/3 of billings), and recognizes the rest as revenue. Cardlytics currently works with hundreds of advertisers across retail, restaurant, subscription services, travel and entertainment, grocery, e-commerce, and luxury brands including Starbucks, Disney, Chipotle, DoorDash, and Dunkin’ Donuts.

Although Cardlytics does not own the bank channel, it creates lock-in for all stakeholders through its win-win-win value prop:

Advertisers

Advertisers value advertising channels on the basis of three factors: scale, return on ad spend (ROAS), and measurability. Cardlytics is able to provide 5x incremental ROAS, verified through control groups, across unmatched scale. It generates such high ROAS because it targets offers based on users’ historical purchase data, which is evidently a great predictor of where they will continue to shop. Offers can be targeted specifically to capture wallet share from competitors for existing customers or win new, loyal customers by incentivizing them to try new products. Bank channels are also a brand-safe environment and Cardlytics can conduct randomized control trials to find actual incrementality and give certainty in results, again due to the transaction data.

Banks

Banks primarily value user engagement, as they seek to differentiate their banking experiences from competitors and drive increased spend. To a lesser extent, they value the revenue share that Cardlytics provides. Cardlytics succeeded in getting bank transaction data where dozens of other start-ups failed because the bank data never has to leave the banks’ firewalls. Advertisers give all their targeting parameters to Cardlytics and Cardlytics’s algorithm goes into the bank data to find the relevant users without actually seeing any personal identifiable information (PII).

Bank Customers

Bank customers value discounts, which we know from their usage of direct-to-consumer cashback apps like Rakuten. Cardlytics is able to offer greater discounts as a function of its superior targeting and attribution, which can range from 5% off coupons to free meals and $50 off coupons. Cardlytics is unique in that there is a symbiotic relationship between advertisers and consumers. Contrast this with any other ad platform for example, where more advertisers create a worse user experience and in some cases like Facebook, cause privacy concerns through very granular targeting.

Competitive Advantage

The value that Cardlytics provides for all stakeholders enables a network effect, whereby more banks mean more consumers, which attracts more advertisers, leading to more engagement which attracts even more banks.

These network effects result in a natural monopoly because banks have limited digital real estate and thus face a high opportunity cost (fewer and worse offers) if they were to leverage a subscale competitor. Industry experts have also mentioned that having multiple providers on a single offer wall would lead to a worse and more confusing experience for customers. Security is also the utmost priority for the banks, and they are unlikely to trust a smaller competitor that doesn’t have the decade-long track record that Cardlytics has.

Since banks are competing with each other, they will also find it difficult to do this themselves because no single bank can match Cardlytics’s scale as the neutral aggregator. The largest bank, JP Morgan Chase, had just 17% market share in terms of cards issued as of 2024. Some of Cardlytics’ largest bank partners have tried to start their own programs but ultimately were not successful because they lacked the scale to attract advertisers.

Competition

Cardlytics’ competition falls into 3 categories. Those that connect directly with banks, direct-to-consumer card-linked offer sites, and in-house bank programs.

Bank Channel

Figg is the only competitor that integrates directly with banks. Figg was acquired by JP Morgan Chase in July 2022 to expand JP Morgan’s existing cashback program, Chase Offers. In April 2024, Chase officially announced a rebranding of Figg under ​Chase Media Solutions​ where they would seek to offer targeted cashback offers that complement Cardlytics.

Overall, Figg is not a concern as they are a fraction of the size of Cardlytics as they only have access to JP Morgan’s userbase of ~80M users compared to Cardlytics’ 168M MAU base. As previously mentioned, more MAUs means more advertisers, and other banks are unlikely to want to use JP Morgan’s internal offers program.

However, it will be important to monitor the quality and quantity of Chase-sourced offers going forward given the concentration of Cardlytics in Chase. ​Swany407​’s Substack offers this data to subscribers.

Direct-to-Consumer Apps

The second type of competitor are DTC card-linked sites like Drop, Rakuten, and Dosh (acquired by Cardlytics in March 2021). Consumers sign up directly for these sites and link their cards in exchange for cash-back rewards. Some of these sites can be quite popular despite their smaller scale and lower level of discount (5-10%). However, users must make the purchase on the app or website so it is not seamless and generally caters to coupon-clippers that would have made the purchase regardless. This makes them structurally disadvantaged relative to Cardlytics from a ROAS perspective.

Digital wallets like PayPal have also announced their own offers programs. However, because of smaller userbases and different userbases, it is unlikely to materially impact Cardlytics. In fact, it may galvanize Cardlytics’ bank partners to further lean into Cardlytics to keep users on the banking apps, which would certainly be a boon for Cardlytics.

In-House Bank Programs

The last type of competitor are in-house bank programs. The largest two are Capital One and Citi. Citi previously started implementation with Cardlytics but didn’t want to put in the work so Cardlytics rejected them. Capital One acquired Wikibuy in 2018 to help build Capital One Shopping, its own offers program.

Given the smaller userbases, reflected through fewer advertisers, I believe that both Capital One and Citi present more of a future opportunity for Cardlytics than a threat. Amex arguably had the best in-house cashback program with even higher cashback offers than Cardlytics in many cases due to their willingness to self-fund offers, but they chose to participate in Cardlytics’ network, presumably to avoid falling behind competitors such as Chase.

Opportunity

Cardlytics has an incredibly valuable data asset that has been barely scratched the surface in terms of monetization due to a weak advertiser-facing offering and skepticism about measuring returns, the long time it takes for changes to be reflected on banks, and Cardlytics being unable to access brand marketing budgets because they can only see which retailer the customer purchased at rather than the specific products bought. However, all of these drawbacks are currently being addressed and I believe Cardlytics has a very long runway for ARPU growth from here.

For perspective, the average American spends ~$18,000 on their credit cards per year. Even just assuming that 20% of Cardlytics’ user base is engaged and spends $20 per week through the platform, that translates to ~$200 of average spend per user per year.

On average, $1 of ad spend drives $5 of spend to the advertiser. Assuming the advertiser is realizing 5x ROAS, that translates into ~$40 of billings per user per year ($200/5). $40 of billings per user on 170M MAUs translates into $6.8B in billings and ~$4.5B in revenue for Cardlytics, compared to the $309M in revenue that it recognized last year.

Another way to frame the opportunity is by looking at the ARPU that Cardlytics has historically achieved through their best bank partners. ARPU dipped from $2.30 at the end of 2018 to $1.91 in 2023 as Cardlytics added Chase and Wells Fargo and greatly expanded their MAU count. However, I believe it is reasonable to expect ARPU to surpass $3 over time as bank partners further lean into the platform. Furthermore, Cardlytics has historically had a very basic interface with just a logo and cashback coupon. This was not very engaging because while it may have worked for large, well-known brands like Starbucks, smaller brands would have little uptake. However, the new user interface and experience which Cardlytics has worked on for the past few years and is now rolling out across banks contains much richer imagery like videos and push notifications which has resulted in a 30% increase in redemptions so far.

Financials

Despite the strength of the value proposition and the size of the opportunity, Cardlytics’ financial performance since its IPO in early 2018 has been mixed. Revenue growth thus far has largely been driven by MAU growth, as Cardlytics signed Chase and Wells Fargo in 2019 and more than doubled MAUs. Under Karim’s lead, Cardlytics returned to EBITDA positive in 2023, reporting a 1% EBITDA margin and remaining around breakeven thus far.

Cardlytics records the gross amount charged to advertisers as billings. Around one-third of billings is set aside to be used as consumer incentives, funding the cash back rewards. Of the remaining two-thirds, slightly less than half is given to Cardlytics’ bank partners as partner share, with the remainder forming Cardlytics’ adjusted contribution margin.

As of June 1, 2023, Cardlytics’ largest bank partner Chase decided to lower their own revenue share. This resulted in adjusted contribution margins rising from 32% of billings to 35% of billings as of Q1’24. Cardlytics was likely able to convince Chase to do this through the move to the new ad server, which increased redemptions by 30% as of Q1’24 compared to banks not on it. Cardlytics has further noted that they are in discussions with the remaining banks on lowering revenue share.

Cardlytics recently dropped 40% after reporting a top-line miss in Q1’24 stemming from higher-than-expected redemptions. Currently, 64% of revenue is coming from cost per served sale (CPS), meaning advertisers pay when a user is shown an impression and makes a purchase, regardless of if they activated an offer. Therefore, billings under CPS are not a function of redemptions, but Cardlytics is responsible for paying out the redemptions from the billings they collect.

Since redemptions grew 20% YoY this quarter, Cardlytics’ revenue growth was just 8% YoY whereas billings grew 12% YoY this quarter and is guided to grow 12% YoY next quarter at midpoint (excluding the Entertainment acquisition which they divested). This represents an acceleration and the fastest YoY billings growth since Q3’22.

Cardlytics is addressing this by aligning their pricing models to redemptions by announcing a move to cost per redemption (CPR), where Cardlytics only charges when an offer is activated/redeemed. Higher redemptions are a significant positive for the business long-term, as it results in better returns for advertisers and closer relationships with bank partners. Therefore, I believe that the correction represents an opportunity for investors, particularly given the significant near-term catalyst with the launch of Amex.

Amex Partnership

On March 15, 2024, Cardlytics announced a partnership with American Express. I believe will lead to a significant inflection in the business over the next 12 – 18 months. For perspective, JPM is CDLX’s current largest bank partner and >40% of the revenue share that Cardlytics pays out. Based on Nilson data, Amex is 1/3 the size of JPM in terms of cardholders but 90% of the spend so it could be similar size to JPM in the future. They didn’t announce timelines but based on past rollouts I think it should be done by Q3 to Q4’24. Notably, CDLX is guiding to positive operating cash flow and double-digit billings growth in 2024 without any contribution from Amex.

I believe that the market underappreciated the fact that unlike other bank partnerships, Amex will not be charging Cardlytics any revenue share. The wording in the 8K is noticeably different from previous bank partnerships in that it doesn't mention revenue share and management further hinted at this in subsequent conversations. This means that all the advertisers that Cardlytics brings to Amex’s platform will be pure incremental earnings, aka they will come in at >90% gross margins, as opposed to 45% gross margins previously. Furthermore, Cardlytics could take on Amex's existing advertisers which could result in an immediate revenue boost if Cardlytics decides to upcharge them.

I believe Amex will bring 20M to 30M additional MAUs to CDLX’s platform (currently at 168M MAUs). If we assume that there are 25M MAUs that come in at the same ARPU as CDLX has for everyone else (which I believe is highly conservative because Amex users spend 3x more than Chase) then that means $50M of incremental revenue or $45M of gross profit. The substantial majority of this should drop to the bottom line, given there are few costs associated with onboarding a new bank.

Cardlytics’ 2023 full-year revenue was $309M so they can grow 16% alone from Amex. If we assume adjusted EBITDA of $40M then Cardlytics’ adjusted EBITDA margins can improve from 1% to 8% just from this partnership. Note that this does not include revenue from Amex’s existing advertisers, almost all of which will drop to the bottom line given no revenue share. At scale, I believe that Cardlytics can achieve adjusted EBITDA margins of at least 20%, both from scaling into a largely fixed cost base as well as improving gross margins driven by a trend of decreasing revenue share to the banks and the >90% margin from Amex.

Given these developments, I believe Cardlytics can grow billings and adjusted contribution at least in the mid-teens YoY this year and next year in a stable macro environment even without Amex and potentially accelerate to over 30% YoY revenue growth after Amex.

Valuation

Cardlytics is currently trading at an EV of $550M pro forma for the recent dilution and Bridg earnout payments. As of Q1’24, Cardlytics currently has $65M of cash, $218M of converts ($172M due in 2029 and $46M due in September 2025), for net debt of $153M. They also have an unused $59M line-of-credit.

In light of the fluctuations in revenue due to the change in pricing models, the KPI to track for Cardlytics is adjusted contribution, which is calculated as Cardlytics’ portion of billings after backing out cashback and bank partner share. Adjusted contribution makes up ~36% of billings. Cardlytics is expected to grow billings by double digits this year, so if we assume they grow 12% YoY, assuming no further acceleration from Q2, then Cardlytics will earn $507M in billings and $182M in adjusted contribution this year. Therefore, it is currently trading at just 3x 2024 EV/adjusted contribution, which is comparable to EV/gross profit.

For perspective, ad-tech peers like PUBM trades at 4.9x 2024 EV/Gross Profit and 10x NTM EV/EBITDA while also growing in the low-teens, MGNI trades at 7.6x 2024 EV/Gross Profit and 10x NTM EV/EBITDA while growing in the low-teens, and ROKU trades at 4x 2024 EV/Gross Profit and is growing in the low-teens. However, these platforms all operate relatively commoditized ad-tech offerings and are seeing declining, rather than accelerating, growth. That being said, there is clearly room for Cardlytics to re-rate higher based on comps.

I previously noted that I expect $40M of EBITDA from cross-selling into Amex based on applying Cardlytics’ current ARPU to a conservative estimate of Amex’s userbase. In addition to cross-selling, Cardlytics could take on Amex’s current advertiser base and may choose to charge them a fee for advertising on the platform given they are not paying any today. In ​Amex’s 2024 Investor Day​, they noted $220M of offers were redeemed in 2023. Consensus is currently modeling $28M in EBITDA in 2025 which would be a 7.8% margin after 3.1% YoY revenue growth this year and 13% growth next year. I believe that this is achievable prior to any contribution from Amex from the current billings growth trajectory, netting $70M of combined EBITDA.

From this, we can reasonably estimate that Cardlytics is currently trading at just ~8x 2025 EV/EBITDA. That is very cheap for a monopoly, capital-light business that can potentially grow >30% next year and >15% CAGR for a long time. I believe that shares could re-rate to at least a mid-teens EBITDA at that point based on the growth runway, the opportunity to further expand EBITDA margins through operating leverage and lower revenue share, and the significant competitive advantages, resulting in >100% upside.

Further supporting the growth opportunity is this slide from Amex’s 2024 investor day, where they laid out a target to 5x cashback value redeemed by 2026. If Cardlytics takes on Amex's existing book of business, then this has the potential to make the business worth multiples of its current value alone with conservative estimates of economics surrounding the split.

Risks

Cardlytics removed liquidity concerns recently by addressing two major issues created by the previous management team: the Bridg acquisition earnout payment lawsuit and the $230M convertible due in 2025. This resulted in significant dilution with shares outstanding increasing 23% from Q3'23 due to the Bridg settlement and $50M ATM offering. If we further assume the dilution from the $172.5M of 4.25% Convertible Senior Notes due 2029 with an $18.02 strike price, then diluted shares outstanding have increased 54%. The risk remains that management could continue to be dilutive or significantly scale operating expenses, thereby leading to lower-than-expected EBITDA.

There could also be the risk that a major bank partner leaves though I believe this is mitigated by recent developments, such as Chase further leaning into Cardlytics by giving Cardlytics more revenue share and being the first major bank partner to adopt the new ad server. Nevertheless, the previously mentioned April 2024 launch of Chase Media Solutions (CMS) has become a key bear case. It will be important to watch CMS as a percentage of overall offers to determine the severity of this risk, which you can do by subscribing to ​Swany407's blog​.

It is also important to note that Chase had previously attempted to build an in-house solution prior to joining Cardlytics by acquiring Bloomspot in 2012. The ultimately were unsuccessful as they could not get advertiser relationships due to channel conflict and an undeveloped platform. These issues still exist today, but Cardlytics has made a lot more progress since 2012, making it even more unlikely that Chase is successful. Amex also had the best independent cashback program, with higher cashback and more offers than Cardlytics in many cases, so their decision to join Cardlytics is a major validation of the platform and further reason for remaining banks like Capital One and Citi to join.

Feel free to reach out to me on ​LinkedIn​ if you'd like to discuss Cardlytics or tech investing.

Check out my Substack here: https://richardchu97.substack.com/