Chit Chat Stocks - The Next Carvana? A Potential Cardlytics Stock Inflection With IndraStocks (CDLX)

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Starting point is 00:01:25 Today we are joined by first-time guest of the show. He goes by Indra Stocks, and he is the author of the Indra Stocks Substack. And today we are talking about a company. I don't know if we've really ever discussed it on here, maybe once before, but it's one that Brett and I are less familiar with. It's called Cardlytics. And I guess I'll just start with how you found this, Cause I know it, you know, it's come down quite a bit from its high.

Starting point is 00:01:52 So I guess what inspired you to start looking at this and take a deeper look? Sure thing. Um, so I started out as a analyst, a family office a few years ago and slowly transitioned into a more portfolio manager role. And earlier on in the analyst days, it was 2020, 2021. um you know cardlytics was obviously booming i think the stock peaked at 300 something like multi-billion dollar market cap blah blah blah and i think the idea there was pretty good right where this is a company that they sell ads in a bank channel you know a bank isn't going to want

Starting point is 00:02:36 to partner with a bunch of different ad sellers so they sort of have a little bit of a monopoly in the bank channel they had just landed jp morgan chase as a partner so they had jp morgan chase wells bank of america the story was pretty in the sense that you know they had this environment pretty locked down and there have been quite a few competitors who had tried to enter this space and failed previously uh but the stock was you know pricing in like pretty substantial growth so i come across it in that family office role um just because there's a lot of other smart people that we would interact with that had invested in it and would talk about it and it started to become a lot more interesting to me as the stock fell in 2022 um just because around that time you know

Starting point is 00:03:28 there's quite a few companies that were going down 80 90 95 99 that year so it's But the story, I think, the underlying thesis, high level, was still relatively intact. There were some hiccups along the way, but it became pretty interesting, I think, at that point. Okay, so let's – we'll talk about the business overall, get a little more in-depth there in a second. But I guess let's give some context around what's happened the last couple of years. So you mentioned that they soared. I think they hit a peak kind of in 2021 here, and it looks like they've dropped roughly 94% off of its highs. So why has it come down so far?

Starting point is 00:04:17 And then I guess part of that might just be because it was so exciting at the time. But I guess what's happened over the last three years that's created this, I guess, rough returns? Yeah. So this is a company that we've been around for quite a while. And as an advertising platform, you get a really big benefit when you're scaling the number of users that you can sort of sell ads to. and Cardlytics for the first you know decade of their existence was able to basically just add new users over and over and over again so they just they'd land Bank of America and then a few years later they'd land Wells and a few years later they'd land JP Morgan a few years later they'd land US Bank so it's a really great way to say like we don't even need to make any product improvements we're just increasing our user base by like 20 percent a year so our revenue is going

Starting point is 00:05:16 to grow 20 something percent a year so that's kind of how it went historically and after they landed chase you sort of enter 2021 and there's not any big banks really to add left like it's pretty much amex is only potential partner that you could really get and at the time you know they've been talking to amex on and off for a while and amex just wasn't super interested so they ran into a place where they needed to improve the product and this is a company where the founders they had both been bank people you know they were working on like loyalty at uh i think it was pnc prior to founding cartelitics so they were really good at you know getting those relationships with banks getting into the ecosystem but they were really bad at product

Starting point is 00:06:03 so as you know user growth stagnated you also started to see pretty significant revenue stagnation and unfortunately for them that also overlapped with you know the post-pandemic sort of withdrawals where it's tough when you had you know explosive revenue growth and then suddenly it stalls out just because of you know the mix of macroeconomic factors as well as you know poor product decisions so they weren't making a lot of progress like they were promising things that just weren't happening because it's pretty slow to do you know software engineering with a bank partner and also there was some very very very value destructive m&a activity so it was a convert where they had to pay out you know a bit over 100 million and at the time you know the stock price

Starting point is 00:06:55 was like 100 bucks so they're like you know we'll face a couple percent few percent dilution it's not a huge deal like we'll just purchase this thing uh it'll work out for the business blah blah um unfortunate part is there's no collar so when the stock goes from 130 bucks to three bucks you start to face this you know sort of death spiral where you have to issue you know 20 percent of your market cap and equity as well as pay out like 80 percent of your cash balance which isn't great when you're also facing you know a macroeconomic slowdown and poor covid comp so it was sort of a perfect storm of things going wrong for them that's caused the significant stock drawdown and because of the dilution it's you know it's not like they're gonna

Starting point is 00:07:45 get back to the same place they were before so it is significantly diluted from where it was prior to 2021 which is unfortunate but if you own it after it's not as big of a deal right yeah yeah if you didn't experience the 95% drawdown that's always a good thing and You know, it can be. We did talk about this before the show. What can be attractive with these type of situations is when something goes down so much over multiple years, so many people hate it, disregard it for no reason. And especially if they've been hurt by it, they have the battle wounds that maybe a fresh face does not. Now, we're going to talk about the recent stuff, you know, in your write ups that you've done. You've done two recently that I thought were quite good. And we're going to talk about the difference between billings, revenue, and contribution. We're going to talk about the Amex partnership along with the Chase relationship and maybe the gives and takes there and the new management team.

Starting point is 00:08:36 But I want to maybe confirm for the audience here because it's a business that isn't as intuitive. But once they've probably interacted with the product, they'll understand it. So essentially, correct me if I'm wrong, they work with a bank, say Bank of America. And then they also work with a bunch of retailers like, for example, a Lululemon, who may or may not be a partner. They make promotions for Lululemon, put them into the Bank of America app. And Lululemon wants to work with them to get a new customer from Bank of America. Bank of America wants more spending on their cards. And Cardlytics works as a middleman there.

Starting point is 00:09:12 Is that correct? And is that their entire business model today or is there anything else on top of that? Yeah, so that's sort of the basic idea. So if you have Chase, Bank of America, Wells, and you go into your bank website or bank app and you scroll down to your Chase offers or your Bank of America deals, it's always bank branded. So Cardlytics doesn't have any branding within the bank app, but those offers are powered by Cardlytics. So what Cardlytics does is they go find advertisers, your Lululemon, your Starbucks, your Chipotle, whatever. And they say, you know, we're going to give offers to bank customers in the bank app. The way we do it is we do like percent cash back.

Starting point is 00:09:49 So if I'm Lululemon, I want to give customers 10% cash back. Then when that customer, they go buy something from lululemon.com or they go to the Lululemon store and they buy something, that transaction will show up in their bank statement and the bank will give them that 10% cash back. And that's funded by the advertiser. And then everybody takes a cut of that. So that's the majority of the business. And then they're also working. This is sort of newer, and there was a post by them and the CEO on LinkedIn yesterday about Ripple and Bridge. So what they're doing with those two is they're going to retailers and grocery stores, and they're asking them to basically give them their point-of-sale data.

Starting point is 00:10:31 And they try to combine the point of sale data with some of their transaction insights and give those retailers, you know, a better perspective of like how customer spend is at their stores and like if it's shifting to competitors. so they can do a little bit of that analytics with some of that additional data and that's something they've been trying to move into more because obviously if you can see every bank transaction for hundreds of millions of cardholders in the U.S., it's pretty valuable data. So they've been trying to monetize that a little bit more

Starting point is 00:11:05 and that's something that they're working to this year. Yeah, and they do have a surprising amount of users. I think 186 million I read in your report there. total there's it's a little complicated right because there's you know total cards in the u.s which is like people are going to have numerous cards they see hundreds of millions of cards and then obviously you're going to have people they have numerous bank accounts so they've changed their mau disclosures i think a couple quarters ago where they were not deduplicating it as well um because if you're bank of america and chase like they

Starting point is 00:11:42 don't know your name and everything they just see your transaction data so it's a little hard to tell like who's a unique user and then can also be hard to tell like if I have two cards at the same institution like all that kind of stuff and like they only look at people that use the app or engage digitally on the website so there's some card holders that they don't do either of those so the MAU number it's you know cutting out a lot and it's also that MAU number is sort of like the theoretical amount of people that can view the ads. It's not like the actual number of people clicking into the ads and activating ads each quarter. So it's a little complicated on the user side, which can make it a bit tough. Makes sense. Now, if I'm a listener,

Starting point is 00:12:28 first time learning about this company, I want to know the unit economics. And I think this next question kind of leads into that where there's this discrepancy and confusion. I think a lot of people that kind of look at the headline numbers of billings, revenue, and what they call contribution. What are those and what caused the divergence last quarter that you think maybe presents an opportunity for investors? Sure thing. So the main thing is billings. So billings, that's just the number of dollars that an advertiser uses to fund a campaign. So if I'm Lululemon and I want to give you $5 million and you're going to try and generate some return on ad spend for me with that $5 million. So they'll hand Cardlytics $5 million. And then with that

Starting point is 00:13:15 $5 million, that gets split three ways. So some of it will go to the consumer. So that's going to be the cash back. So if there's 5% cash back, then some guy spends $100 on leggings for his girlfriend. Then he gets $15. It's $15 out of that $5 million. Then the bank and Cardlytics, they also need a share. So the bank share, that's called the partner incentive or the partner share. And that, you know, is going to be roughly equal historically to the amount that was given to that guy who just purchased leggings. So guy gets 15 bucks, bank gets 15 bucks. Cardlytics, they get their own share. That's called adjusted contribution.

Starting point is 00:13:56 So they would get, again, historically roughly 15 bucks. so in total it's roughly a 33 33 33 split historically it moves up and down a little bit of billings for each of those buckets between consumer bank and cardlytics revenue is defined as the bank share plus the cardlytics share so it's just billings then you take out However much goes to the guy that just bought something. So that can cause a little bit of confusion, right? Because if a bank decides to take less money and Cardlytics takes even, let's say, the same money, revenue goes down, but Cardlytics is still making the same money. So like that portion of revenue that goes to the bank that was never Cardlytics in the first place.

Starting point is 00:14:49 Like they have contracts with banks that sort of like stipulate how that partner share is determined. so what happened in the most recent quarter is banks they've been taking a lower partner share over time so like we'll get to this later i assume but cardly just signed amex and part of that amex contract is amex wants to take a zero percent revenue share so the idea i think is that if you're a bank and you take no revenue share then your offers are much better than any other banks Right. Because if historically you're taking 33 percent and if you give most of that back to the consumer, then your offers are like twice as good as any other bank. Right. So we saw Chase last year. They reduced their partner share. And it seems to be the trend in general that partner shares going down.

Starting point is 00:15:37 So that's the money going to the banks, whereas the money going to Cardlytics that's been up as a percentage of billings or flat, depending on like the institution. So you can create this dynamic where, let's say you have $100 million in billings, and it used to be $33, $33, $33. Now it might be like 35% Cardlytics and like 28% for a bank, and then you're only getting to like 63% instead of 66%. So revenue would be down by that 3% difference, but obviously Cardlytics would be up because they'd be at 35% instead of 33%. So they make more dollars, it's just the headline number is going to look worse. So from the bank's perspective, do you think they look at this more as a customer retention, customer attraction tool as opposed to like a revenue generator? Yeah, absolutely. So Cardlytics, they don't share a ton of data on this,

Starting point is 00:16:40 but every now and then they'll give you a little bit of a smidgen just because banks are pretty private. They don't want a lot of sharing of their metrics. And right now Chase is the only bank that's fully on the new UI and everything. So if they give any big info on that, then they're basically giving info on Chase, which they want to avoid. But every now and then they'll say that it increases spend for cardholders that interact with their program by like you know 12 or something versus people who

Starting point is 00:17:09 don't interact or like card churn might be like a couple percent lower so if you look at it from a bank perspective right like let's assume your cardholder churn is like 96 and then with card it's like 98 retention then that extra like two percent retention that can be saving you like you know thousands of dollars on each of those customers that doesn't churn and at scale that can be worth like hundreds of millions or billions of dollars to a bank so it can be worth a lot more than the advertising dollars that they would get and it can also it's helpful as well from like a merchant relationship perspective right where it's like hey like if i'm chase and i really really really want to keep you know some merchant taking my cards i want to have some partnership with them

Starting point is 00:18:00 i can be like hey you want to run like cashback offers through creditics right like we're handling your business accounts blah blah blah like maybe you want to run some cashback offers to our platform so it can be there can be a lot of value generated for banks that isn't just the amount of dollars that they get okay you mentioned american express this is a new i would say the details of the deal um is just an 8k i believe at this point and it was it was three weeks ago there's still you know it's up in the air of what's actually gonna happen over the next few years i think from a shareholder perspective but the question i have for that is why would an american express want to work with cardlytics because if you look at say the american express app today or some other ones

Starting point is 00:18:48 out there they already do some of this on their own um do chase and amex maybe i think they're the two biggest players do they need cardlytics like what what stops them from fully vertically integrating these solutions yeah so i think there's a couple things there um first off i just say that with amex this whole offers in the bank app it sounds a lot easier than it is so like you have to be ingesting you know like a ton of data every single day so you're looking at like millions and millions billions of transactions each day and those aren't always pretty right it's like maybe starbucks accidentally sent up their point of sale system it's like star buck instead of star bucks right like i just misspelled something so you have to clean that up

Starting point is 00:19:43 and then you have to like analyze it all and then you have to serve it to users and you have to like find who the most relevant users are because like there's a limited budget so you can't just send every offer out to every customer and be like well we'll just see how many people redeem because if you do that then you have to eat the difference when too many people redeem or you disappoint an advertiser and too few people were deemed so it's a very intensive process on the data analysis side then also on the tech side because you're working with banks so there's very high privacy concerns like there's sort of the famous like thing in the ad world where like target like gave an ad to someone who was like just got engaged about like um like pregnancy related

Starting point is 00:20:30 ads right and the person's like oh that's weird how do you know i just got engaged like People can be kind of sensitive, and that's doubly true for banks as well as data security. So it's very hard. And Amex, from what I have heard from people who work at Amex, is that they consider Cardlytics to sort of be the best of the best technology-wise, which makes sense, right? Because they're working with a bunch of different banks. So I think what Amex is doing is Amex is looking to do an entire overhaul of their offers program. So Amex, as well as Chase, I think they've realized that with interchange fee pressure, a really great way to make up for that is to just go to advertisers and be like, hey, why don't you fund some of these cashback rewards to consumers? We want to have more interactions with our consumers because there's so many benefits for us.

Starting point is 00:21:23 You want consumer spend. we are a platform with hundreds of millions of users with a bunch of data that we haven't monetized very well historically and so amex and that sort of exploration of redoing their whole offer platform they've been talking to cardlytics sort of on and off for like years now right and i think cardlytics it's hard to say exactly why now that's happening but one potential reason. It's just all the progress that's been made at Chase. So like Chase offers the redemptions there. It was up something like 30% year over year with Cardlytics. So that's a pretty big deal when Cardlytics is driving, like according to Chase's last investor day, like Chase offers is

Starting point is 00:22:09 driving over $8 billion in transactions each year. And if you can sort of continue to scale that and get up in the tens of billions of dollars that's a great way for banks to sort of build out that relationship with consumers and i think that's sort of a trend you've seen in a lot of places like you have amazon where they're trying to go more direct with ads you have retailers like walmart partnered with trade desk to do you know their sort of retail ad network so i think all of these old legacy businesses are really realizing that they can monetize their consumer relationships pretty well and i think the banks are you know they're part of that and with cardlytics right there's not really any alternatives to cardlytics competitively so like chase they acquired

Starting point is 00:22:57 cardlytics is like only semi-real competitor fig um that was a little bit less than two years ago and fig at the time they had like limited relationships with smaller banks and like a trial run with Bank of America that didn't go very well. So Cardlytics was never really at risk of being replaced by another vendor. Obviously, there's concerns of if the banks will replace Cardlytics themselves. And I think to that end, there's sort of two ways to view it. So like Amex, they just signed Cardlytics, right? So Amex, they want to drastically grow their offer program they say hey the cardlytics tech is better let's go with cardlytics and i think another part of it too is that they don't have to have like some giant sales team going around to a

Starting point is 00:23:46 bunch of different vendors and being like hey let's try and do some offers and then the vendors may be like wait you're amex i hate your fees why are you charging me like five percent or something like maybe we can do some offers but give me a little bit back on interchange fees so that's something that's happened historically when these banks have like gone and tried to have that conversation directly and it's also just harder to get scale right so cardlytics they can sell into every bank uh if you try and do it directly as amex or chase you're only selling into your bank so like i know advertisers who advertise with cardlytics and if they like there's not a situation which they can go direct to a bank right now to like replace cardlytics but like in theory

Starting point is 00:24:31 even if they could it's like why would i do that because i would be cutting like my space that i can advertise to by like two-thirds if i just go to chase or if i just go to amex and if you go to like a smaller bank than that you're cutting it even more so it's like you would have to give me a pretty sweetheart deal for me to maintain that exclusivity so like amex right they have an exclusive relationship with uber so like chase they don't have any uber offers like they're partnered with Lyft and obviously Uber has done quite a bit better than Lyft so I'm sure they're a little bit salty about that and part of that is that Amex is funding those Uber offers like they aren't saying hey Uber give us a bunch of money Amex is saying like we're going to lay out

Starting point is 00:25:12 some money because we want to compete with Chase and give our cardholders more benefits so I think Cardlytics plays nicely into that where they can give all these banks a lot of different offer scale to a lot of different offers the tech is very nice and it really plays into sort of strategically where they're moving and the banks like i imagine the way it works is if you're amex you probably want to maintain that uber relationship so you're going to be like i have a few vendors that i really want to be exclusive and i'll have cardlytics provide like the bulk of my offers like the daily spends like your quick serve restaurants your you know constant shopping retailers like a walmart or a costco or something like that right

Starting point is 00:25:53 because I don't want to go manage that relationship. That level of spend is way too high for me to fund that myself as an Amex or a Chase. And Cardlytics, we can just let them do a bunch of tech and we can work on our own tech that would augment that because it has been a thing where banks want some competitive differentiation, but they can have that in tandem with having Cardlytics and just have Cardlytics sort of be the baseline of their offer program.

Starting point is 00:26:25 And it does seem like the offer program is a pretty huge trend in banks currently. Okay. And if I'm looking at, say, as you explained from American Express's perspective, they may have that longstanding relationship with, say, a Delta, a Marriott, or an Uber. They want to make that exclusive almost, and they don't want to have that go through Cardlytics. But if McDonald's or some fast food chain, they have, I don't know, a new promo, a new menu item, and they want to promote it for two weeks, they'd rather work through Cardlytics where that can go blast out to everyone. Amex doesn't really see that as its competitive differentiation. And that's where they have that symbiotic relationship. Is that what you think this partnership is driving at?

Starting point is 00:27:10 And I will say for the listeners, I do follow American Express, and I think they just said they're revamping their platinum card this year. or that's what their timeline is somewhere around this year. So I think maybe this announcement could be related to that as well. Yeah, yeah. So that's pretty much what it is. You know, you have those couple of key relationships. And like if you're McDonald's launching a new product, right, you probably want as much sort of gain as quickly as possible.

Starting point is 00:27:37 So you want that scale. So to put some numbers to it, the Amex platform, I think, does a little bit over 200 million in billings per year. uh cardlytics does around 400 ish and chase is about half of that so amex and chase are pretty much the same size so if you add in amex to the cardlytics business it'd be them at 200 million chase at 200 million and then all the other banks at 200 million so if you go with only one bank you're only getting a third of the scale which is fine if you're now a higher end item that like your customer base is pretty much all amex cards like who cares anyways you know um it's like if

Starting point is 00:28:16 you're a high-end watch seller or something right like a lot of your customers probably have amex so you can just do that amex offer and it's it's a little bit better brand fit right where you have that luxury instead of like why am i going to my amex card by mcdonald's okay let's talk financials a bit here the uh so they just look in kind of a cursory view here operating income free cash flow it's been negative every year since 2015 eventually this has to turn to the other side why why do you think this will happen um and maybe do you have any sort of idea on when this could happen? Yeah, so there's sort of the simple answer and the long answer.

Starting point is 00:29:01 The simple answer, right, is that this is a fixed-cost business. So think of the incremental cost to serve someone an ad via AWS. It's like a fraction of a cent. You're just sending an API request real quick. So any additional scale you get sort of drops pretty much fully to the bottom line. The only problem with that, of course, is if you are a subscale business and you have to build out this giant data science team

Starting point is 00:29:29 and this big software team to work with banks and you have to build out your sales team. When you don't have scale and you're ramping that, you're going to lose a lot of money. So I think that is sort of what happened historically. And historically, the growth was there that people were like, you know, you're losing money, but you're growing a ton. So this is pretty worthwhile.

Starting point is 00:29:51 And that story only sort of breaks when revenue starts to decline. And that's kind of what happened in late 2021 and 2022, where it's like your revenue is falling, your expenses are pretty flat. You were doing a lot of M&A activity, but, you know, the math just ain't mathing. So I think that's what they worked on a lot in 2023. So they cut out some costs to the business because, you know, it's at that point they had pretty much built out the platform. It's just like getting it into bank hands and growing it. So they're able to cut out a decent chunk of costs and they're pretty much free cash flow break even currently. So like next year, they'll probably like if we exclude any benefits, like they're just guiding to like 10 to 12 percent growth.

Starting point is 00:30:39 They grow that they're probably like net income break even on a gap basis. That's with your stock based comp, blah, blah, blah. And also it's one of those cases where it's like you had some terrible M&A activity. you have to write that down your dna looks absolutely insane so your gap net income looks horrible but it's like really all you did was you let some cash on fire it doesn't mean your operations are actually like you know falling off a cliff so it's in theory they can get back to growing and they've already sort of built out everything on the cost side and everything falls to the bottom line so it should be a lot easier for them to make money going forward and in the

Starting point is 00:31:20 worst case you know they're pretty much break even currently okay so you mentioned lighting money on fire they uh they have put in a new management team here it seems is this um i guess can you give some context on maybe who they are any sort of background you think is relevant and then do you trust them yeah so there's like the new ceo kareem um he was added just like 18 months ago or so um but we can go back even further than that so they replaced their chief product officer uh i think it was like six months prior to replacing kareem because i think what they realized was you sort of go through all the old earnings calls and disclosures they're promising a lot of stuff with products that just wasn't happening and previous management they made a

Starting point is 00:32:14 lot of bad decisions but i think one of their good decisions is they realized they needed to really revamp the product team so it started and i think it was either late 2021 or early 22 they basically laid off a bunch like the data science team because they're doing things very manually and they were like okay we need to make this a modern you know data enabled advertising business so that's uh his name's peter chan he's a cto and they got a new cpo like jose singer um so those two guys they're from yahoo um yahoo obviously not the best business in the world but i think technologically it's sort of building out you know block and tackle advertising stack is not the hardest thing in the world it's just sort of doing it in a bank environment that can be difficult and

Starting point is 00:33:02 I think they're just a little bit more aware of what they needed to do technologically compared to previous management, which had no tech know-how. The example I was given speaking to engineers previously, it's like they found a oil field and instead of building, you know, oil wells and drills, they built a bunch of cups and they handed them to some data scientists and told the data scientists to go pick up cups of oil and bring it back. so that's a transformation that's been underway for a while and then in comes Kareem so Kareem he is the new CEO and he used to be at Stripe Google he was doing like wallet offers at Google

Starting point is 00:33:43 and then obviously Stripe big payment business lots of tech related to banks blah blah so it's a pretty good overlap with his experience and he was building out you know sort of the Google advertising business in the APAC region for a while, so he has experience scaling an advertising business. So in theory, that's a pretty good hire, and obviously with Stripe, you would hope he has a lot more tech know-how, considering he's managing tech teams than the previous management. And since Kareem's joined, we've gotten the new UI launch at Chase, so that was in development prior to his tenure, but we actually got it out the door under his tenure. And then it's a little bit hard because last year you had to put out some financial fires instead of really focusing

Starting point is 00:34:25 on products just because you know the way macro was and the way the business had sort of been set up financially which wasn't his fault so i think it's a little hard to blame him for what was happening to the stock in the interim and this year i think they're really focusing on executing on products so it's a little bit of a we'll see how it goes because you know they've said that they want to get a lot more analytics in the hands of advertisers and like dashboards really make it like a modern advertising company and that's something that they've started to pilot this year and there's no banks in their way so like historically carletics is business where they'd like guide to some tech improvement at a bank and it always takes six to twelve months

Starting point is 00:35:08 extra just because like it's a bank and banks operate on their own timelines and sometimes even if something's planned it's like oh we're a bank so we have to kick it to next quarter so this is the first time they're really doing a big tech overhaul on their own terms and it seems like in theory i think that's a really good idea so like previous management they're working on like self-serve for small businesses and small advertisers and like i don't think that's really a good idea because like cardlytics it's it's not at the point where you can really be self-sufficient like it's very white gloves still so that's what they've been trying to improve so if you launch self-serve but the business is still white glove then you just have a self-serve platform that is

Starting point is 00:35:52 pretty worthless so it didn't make a whole lot of sense to me under previous management what they were doing with product there and like the prioritization whereas it really seems like kareem peter and jose like their eyes on the ball quite a bit more with product and they're doing things in the right order so they're building out analytics and the last earnings call they're asked about self-serve because that's been something people have been asking about for a while and it's like they said basically like yeah that's still on our radar but like we have more pressing issues and so i think they've done a great job at prioritizing and we'll sort of see how that plays out in practice this year but it does seem like they have a much better idea of

Starting point is 00:36:31 how to handle product and they have not acquired anything for half a billion dollars that they had right down by 90 something percent yet so that's also a plus that's a good hurdle yeah yeah that's a that's a low bar yeah from this uh from this existing management team um i will say as we're recording here ryan may have to hop off for any of the people that are watching on video so he has to go to work he does have a uh an important job he has to get to so that might happen but we're going to basically close out here with talking about you know a fun question what's the upside here. If Cardlytics goes right, then there are some Twitter follow-ups that I want to put in as well, just for the people that ask those specific questions. We want to make sure

Starting point is 00:37:11 we hit them. So sounds like we could be at a potential inflection point. Obviously, it's not guaranteed to happen. I just checked there, say EV to gross profit, and it's below five. So there's, you know, the expectations here, if they can, with that fixed cost base are pretty low, right? I mean, it seems like people are expecting it to really go nowhere. um for for a while here or just for for the indefinite future so at a stock price below ten dollars just below ten dollars as we're recording this what's the upside here if things go right and what do you think the downside is here is the balance sheet risky you know just upside and downside as we close things out just a couple things finchat.io is the complete

Starting point is 00:37:55 stock research platform for fundamental investors they have all the standard financial data on more than 100,000 stocks globally. And beyond that, they have company-specific segment and KPI data on more than 1,500 stocks. So to give some examples here, you want to see Netflix's average revenue per member over the last 10 years, they've got it. You like to track YouTube's advertising revenue, they've got that too. If you want to see Celsius's revenue that comes from Costco, how much of their revenue comes from Costco, they also have that. So the breadth of FinChat segment and KPI data truly is one of a kind. I use FinChat every day to track and manage all my investments. I also use it to discover new investments. And if you want to get 15%

Starting point is 00:38:38 off any paid plan, go to FinChat.io slash chit chat. That's FinChat.io slash chit chat to get 15% off any paid plan. The link will also be in our show notes. Earlier in the show, you heard us talk about the investing platform, public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, US members only.

Starting point is 00:39:21 I guess a couple of things. So catalyst wise, like they aren't going to face, you know, anything hugely transformational until Amex launch. So Amex launch, I'm guessing that's late Q4, maybe initial testing this year, maybe early Q1 with a full launch by Q1 or Q2 of next year. So that's, I think, in theory, right, I mentioned earlier, Billings is like $200 million at Amex versus like $400 million overall at Cardlytics. We don't know how much of that is going to end up at Cardlytics. We don't know, like, how beneficial that cross-sell is. Like, maybe they can get Amex at $300 million. No idea. So that's something that is very hard to assign a value to. But in theory, right, that could be north of 50% Billings growth sometime in 2025.

Starting point is 00:40:10 Excluding that. This is a business that is, I guess also as a disclaimer, there's a very, very wide range of outcomes, right? Like if you just look at their Q2 guide, you could drive a truck through it. Like it's somewhere from like 17% growth to 7% growth in terms of billings, which implies quite a few different things, right? So I think the core things to look at are going to be billings and adjusted contribution and how those sort of shake up over the next, you know, 24 months. But if this is a company that they can grow sort of at that midpoint, at that like 10 to 12 percent range, they're doing somewhere around gap break even next year. And you're adding like 20 million dollars of earnings power, roughly, if you're growing 10 percent. So you do that for a couple of years, you're in the $50 to $60 million range by like 2028.

Starting point is 00:41:05 And I think the enterprise value is, let's see, changes quite a bit. I think I saw, unless the aggregators are wrong, a bit over $500 million. Yeah, a bit over $500 million. And so it'd be like 10 times earnings in like three to four years. So they can just sort of execute at a pretty basic level. And Amex isn't, like, that's sort of, like, excluding Amex. And then, so I think that creates a pretty decent little margin of safety, I guess, where the business just sort of chugs along and you don't really believe that much in Amex. Like, you're probably getting a slightly market-beating return from a single-digit stock price, assuming there's no, like, hiccups in the business, which is not guaranteed with them.

Starting point is 00:41:55 on the plus side if amex is you know adding 50 to billings and they really execute well with like this advertiser analytics platform and like they're coming in at the high end of billings in q2 at like 17 you start getting to a business where you could be growing 30 to 50 billings year over year for quite a few years like that's if you look back a few years when they added uh jp morgan chase like they were getting quarters where they were growing billings by upwards of 50 and amex is pretty similar in size to that so it really just depends on what that relationship looks like but this is a company where you double billings like you're at 800 million and suddenly your gross profits at 400 million like you're talking hundreds of millions

Starting point is 00:42:45 of dollars in incremental earnings just because the unit economics of a fixed fixed cost business model with no marginal cost. And that can get you to a stock price that is 5, 10, 15, 20 times higher than it is currently. It just kind of depends on how they can execute there as well as what it ends up looking like with Amex. So it seems to me like that's sort of the skew is in that positive direction, just because we see JP Diamond talking about how offers are a big deal. We see Chase really investing heavily in the platform and chase is growing 30 year over year with cardlytics so the overall cardlytics growth rate is lower because like bank of america and wells and some of those older banks they aren't as technologically advanced as chase and for some reason chase really

Starting point is 00:43:37 sees what's happening here and they think they want to invest a lot in offers and it seems like amex does as well but bank of america and wells it doesn't seem like as much of a big deal so is more the business becomes that amex chase that really want to invest in offers you can get like pretty sudden accelerations in buildings growth which would be hugely beneficial to the downside they have 200 million in convertible debt it's due in 2029 i believe that isn't really a huge deal because they would have you know four years five years to sort of figure that out and 200 million obviously they can refinance it they refinance it this year it's hard for the stock i think to be drastically worse than it is currently just because you're roughly break even you have

Starting point is 00:44:30 cash for five years you have been growing even with like a rather mediocre product and historically mediocre management team so even if you just sort of chug along and things aren't growing that great Like, I don't think it's something that has, you know, significant downside potential. It's not like there's bankruptcy potentially around the corner, which was sort of the whole scare in 2022 and 2023. All right. That's, I think, a great sum up of the bull case and some of the downsides there and what could go right.

Starting point is 00:45:04 There are a few good Twitter questions I think can help with some follow ups that any people have. First one, I think is interesting. a couple people asked about similar things on this is targeting and measurement where carlytics is as they talk about supposed to be better than almost all other ad platforms so return on ad spend should be you know similarly better what uh why do you think advertisers maybe aren't appreciating these advantages at the moment sure thing so part of the way carlytics works right is they will show ads to some portion of their users

Starting point is 00:45:42 and then not show ads to another portion. So you have your test group and your control group. Pretty basic. And what they do is they try and measure incrementality through those groups. So it's like, we have 1,000 people who show them offers, 1,000 people who don't show them offers, and 70% of the people with offers buy,

Starting point is 00:45:58 50% of the people without offers buy. Then we sort of got you that incremental 200 transactions. And that's how they're going to measure their return on ad spend. so from what i've read from advertisers from what i've talked to advertisers about blah blah blah the return on ad spend at cardlytics is obviously really good because you can always tie the ad to the transaction because you have that control group and that test group you know for a fact like people with the ad purchase more like and you have sufficient scale that that isn't really

Starting point is 00:46:30 question like we're talking n equals 10 000 100 000 million so the only issue is that it's not really a high scale platform or a high tech platforms like if i have a meta campaign i can go into a meta campaign i can dump 10 million dollars into that campaign i can see it get consumed in real time i can see that in my numbers because it's meta everyone uses meta you know like 80 90 of adults in the u.s have some kind of meta account we're talking arpu 100 plus like it's really easy to feel the meta advertising so you can be like okay i can see what's happening i have my own internal attribution model as an advertiser i'm like okay like this link was referred by meta whereas with cardlytics like this is a business historically they've had to

Starting point is 00:47:26 growth scale it's like you'll read antigas or something if you have that advertisers where their concern is like you know we tried cardlytics in 2018 and it just wasn't really there for us and we couldn't feel it in our numbers and we didn't know if we should believe them on the incrementality because like they're doing like two million incremental dollars of spend so it's like great returns in theory on that two million but you can't feel it and then cardlytics just tells you a number and you're like i don't know if that's true because i can't feel it and i can't really see it in a dashboard or anything like that so i think that's something where they've been working on that quite a bit so it's that dashboard i mentioned earlier they're trying to

Starting point is 00:48:06 roll that out this year so as an advertiser you have a bit more visibility into how a campaign's going you aren't sort of you know getting a report on how a campaign went like on a 90-day delay so they've been trying to fix that and then also like they've added more scale so they've added chase chase is really leaning in they've added amex soon amex seems to be really leaning into offers so that sort of drastically increases the scale which you can sell ads because when we go from you know two or three million and spend you know six to ten plus million it's a lot more common to see that in your numbers so like the advertiser experience in cardlytics has been a little bit segmented where you have advertisers like Panera or something where they're big they

Starting point is 00:48:54 do a lot of advertising they're pretty competent they put a lot of work into verifying cardlytics and they're pretty happy with it and then you have advertisers where it's like I just wanted to plug this into my model I couldn't plug it into my model I couldn't see it I couldn't feel it like it's not a huge deal to me so that's something that they need to address and it seems like they're working to address yeah and just for reference people are aware that both Chase and Amex are large businesses, but that's combined trillions in annual payment volume. So as you can tell, for a merchant advertiser, that can be quite valuable. There's two more, Abby, that I think are interesting as these Twitter follow-ups.

Starting point is 00:49:34 First one is related to PayPal, which I guess we haven't talked about. Maybe correct me if this Twitter user is wrong, but they say PayPal is launching its own ad business. any chance for cardlytics to work with paypal and i've also seen them trying to add more banking solutions on venmo which paypal owns so cardlytics kind of works with paypal so they acquired a company called dosh and dosh it's basically it's like a little loyalty app you get on your phone you open it up it has like third party rewards basically like an aggregator of that kind of stuff and they put in a pretty ui so venmo was working with dosh so venmo had offers powered by dosh ended up being powered by cardlytics and the thing is that those offers

Starting point is 00:50:24 sort of by nature of that platform can't be as good as bank offers just because the data that a bank has and the data that paypal have are going to be quite different and also just because like the format right like paypal is paypal and the banks are the banks so it's like what you make for one bank is generally pretty applicable to all the banks just in terms of like how you format offers and how you know sort of the pipes work and it can be hard to justify supporting that for just paypal especially if paypal is like completely different data that you have to work with so i think it's not a huge deal to cardlytics what paypal ends up doing with payments just because i think paypal is sort of at a natural disadvantage to banks in regards to

Starting point is 00:51:12 like payment data and also paypal isn't necessarily at a scale where it's super relevant for cardlytics like the venmo dash partnership is not something that they've invested a lot in and they haven't invested a lot in neobanks either i know that was a pretty big focus in like 2021 hype wise but it just doesn't really panned out that way and i think part of it is the engineering reason where it's like i would rather just focus on like trillions of spend i already have and part of that is just much harder to work with those types of platforms that aren't like as stock standard as what they're used to all right last one here i think this one's interesting i actually didn't even know that they had this business going in uh with any listener should probably research this

Starting point is 00:51:59 for any sort of upside stuff as well um it's the bridge platform a few people asked about this they said essentially what's in it for the retailers why do they want to give them their um point of sale data to cardlytics like what what can they provide them can they give them a similar return ad spend as they would on these digital platforms so i think with cardlytics one thing to think about with the return on ad spend is that historically right the way it works is you sort of just get cash back like a flat percentage or flat amounts at some advertiser so like if mcdonald's wants to give me 10 cash back then regardless of what i buy they're giving 10 cash back same with walmart so if walmart does 10 cash back i go buy groceries is that really win-win for

Starting point is 00:52:48 walmart when grocery margins are probably in single digits right so what bridge can do is bridge can get a lot more granular with what exactly is being purchased so instead of just seeing like because if you think about carly's way it's engineered like if you go look at your bank statement and you make a transaction it'll just say like starbucks blah blah doesn't say like every item you purchase. What Bridge wants to do is they want to say, give us your payment data, and then we can see sort of granularly what makes up that check. So if I'm at Walmart, they'll see, oh, you spent 50 bucks on groceries, and it was like lettuce, meat, chips, blah, blah, blah, blah, blah. Then you also spent like $500 on a TV, and maybe our TV margins are a lot higher.

Starting point is 00:53:35 So historically, we don't want to give you 10% cash back because you'll just go buy groceries with it but maybe we're like hey we'll give you 10 cash back if you come buy a tv from us and so it opens up ads to walmart in a lot more of an interesting way so it's primarily retailers and you can also partner with cpgs that right because you can say like okay is it just a walmart check like that's not really interesting but if it's say crest toothpaste at walmart that's maybe a lot more interesting where walmart can work with crest they can be like okay we want to put an ad through the platform and now they can so that sort of entire area of budgets was off limits previously and obviously cpgs spend a ton of money on advertising so bridge is really beneficial in

Starting point is 00:54:22 that way and opening up those new relationships obviously bridge it's sort of been a work in progress on the tech side and it's really sort of coming into its own this year and those relationships are new so it's going to take a while to build them out um so it's not like that's going to be a drastic increase in near-term numbers they've done a couple pilots another benefit of bridge though is for your existing clients like if you are that panera bread or you are that starbucks you're like i want you to come in and buy pastries because nobody buys a pastry at Starbucks. They'll buy coffee and we have way too many pastries, like please buy our pastries. So they can give you like, here's 5% cash back and an extra dollar if you buy a pastry or

Starting point is 00:55:09 something like that. Right. So it just, it makes the ads a lot more customizable for advertisers, which all else equals should drastically increase, you know, return on ad spend and also the amount of money that Cardlytics would make. All right. Well, thank you for joining us today. Let's say as we close out here, anything else you want to talk about Cardlytics for any listeners who want to learn more, anything that you think they should take away from this episode and where can investors find more of your work? And we'll make sure to include those links in the show notes for any listeners to go check out. Yeah, I think with Cardlytics really it's just, again, as a disclaimer, the stuff I do is generally pretty high ball. I've sat on 90%

Starting point is 00:55:55 drawdowns that turn into a thousand percent upsides uh you know do what you're comfortable with um if you dm me that you lost money it's like well happens it's sort of name of the game um and if you want to follow more of my works i've done stuff cardlytics carbana blend labs done a lot more mostly small caps if it's leveraged if it's doing something transformational hopefully i can find interesting stuff i'm on twitter at indra stocks and uh sub stack is also indra stocks so it was great being here i appreciate it guys and hopefully cardlytics works out as well as some of the other ones have worked out yeah i hope so as well uh thank you for joining us i learned a lot so i think and uh any listeners will as well let me hit the disclosure

Starting point is 00:56:51 and we can get out of here, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for listening to this episode, and we'll see you next time. Thank you.

Chit Chat Stocks - The Next Carvana? A Potential Cardlytics Stock Inflection With IndraStocks (CDLX)

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