$CDLX - Where we're at and hopefully going

Been a minute since a CDLX article and there are some worthwhile updates to cover. I’ve done so on Twitter to a decent extent documenting my thoughts, but I’ll condense it here and expand a touch as well. This won’t be super long for reasons we’ll get to shortly, but hope it helps. Cheers

Where We’re At

The Core Business

CDLX Q1 report was quite positive in most respects. Accelerating YoY growth back to double digits was good given the confidence shaking Q4 slowdown. Adding numerous new advertisers back into the channel such as SBUX and TGT and LULU is good and highlights potential gains in sales execution. Any large client can have a meaningful impact on revenue so the set-up for scaling into 2024 seems robust.

Additionally we got more data on how Chase is performing with the new UI and as expected it is meaningful lift over baseline growth. I believe it was +23% for Chase vs +14% for others in terms of redemptions. Chase seems to be continuing to lean in on the CDLX offering with the testing of things like in statement offers and offer notices that can provide significant uplift due to higher awareness.

Many advertisers are also beginning to meaningfully engage with new offer constructs such as multi-tier offers. While this is unfortunate given they are only available on Chase, it also increases the uplift of the new ad server and thus the latent potential within CDLX when (hopefully) the rollouts happen at WFC/BofA and others. Chase should also continue to outperform for the foreseeable future.

These new offer constructs are a huge differentiator if advertisers meaningfully engage with them at a higher frequency. There are numerous solutions available for flat % back offers and while in house programs at COF or something may not support in person purchases, they function basically identically to old CDLX for e-commerce. With multi-tier offers and higher control of offer timing, advertisers can create a meaningfully differentiated campaign from what any other provider can do. In theory these constructs should produce higher ROAS (otherwise why do them) via better targeting and encouraged upselling, which in turn leads to more money and competitive strength for CDLX. The engagement thus far that was called out on the call is a big positive signal for the validity of that product effort.

Austin Swanson

also provides live coverage on what advertisers are engaging with different constructs to his subscribers.

So while the business isn’t drastically accelerating and I don’t expect sudden +25-30% growth rates in Q2, the infrastructure has been set up to support continued growth and leveraging of the relatively fixed expense structure. This provides a solid baseline for CDLX given we entered the year iffy on liquidity in 2025.

Liquidity and Capital Raise

On the topic of liquidity, they did some capital shenanigans as you may know that sort of killed the stocks momentum. I don’t particularly care about the short term share price, but the way this was handled was certainly not A+ or even B+. I’d give it a solid C.

Essentially CDLX had $200m of debt due in late 2025. This can be a problem when your company is barely cash flow positive. As a result they decided to raise money to buy this debt via a mix of convertible notes and share selling. Basically they just diluted by around 20% to get rid of the debt (slightly more complex but that’s the gist). Now given growth expectations and unit economics that can be a rather confusing decision. If one expected them to be doing say $50-80m of EBITDA next year then at 25x or so you’re talking a $1.6b EV, about double where they struck their deals at. Even higher than that could also be possible!

As a result we get to play the fun game of “don’t believe management signals at all and hold the stock” or “is management onto something and my estimates are obscenely off target”. Typically most investors will default to option 2, as it is the safer play and in theory capital allocation is a pretty big deal! It’s stressed pretty frequently that insider transactions are high signal, management knows more, etc, etc. I chose the wonderful path of not believing management signals and I’ll explain why.

1. There’s some research on the topic but basically insider sales tend to be lower signal than insider purchases. Also signal value tends to decrease around 52 week highs. Simple explanation being that executives aren’t really finance guys and Karim obviously is not that guy. Not everyone can be Ernie Garcia stock trader extraordinaire. While an equity raise isn’t quite an insider sale, it’s along the same lines.

2. This is a company that almost inherited financial death due to slinging money around in 20/21/22. A fresh faced CFO and a product focused CEO have no incentive to play games they aren’t particularly good at if it may kill their company. Some extra dilution hurts less than equity being worth $0 in their eyes (regardless of how unlikely that may be).

3. Karim was selling stock earlier this year in the single digits. I am going to make what I believe is a very safe assumption that AmEx was in the works at that time. Clearly that was not a prudent financial decision, so I’m going to go out on a limb that he just has a rather typical understanding of markets that isn’t very nuanced. Nothing against that as the product matters more, but that’s my impression.

4. Even the likes of META do things like buyback stock at $300 then tank it to $80 with unexpected CapEx ramps as investors ask for spending discipline.

As a result I’m erring on the side of not believing management financial transaction signals. Very possible that ends up being wrong and I should hold management teams to a higher standard, but that’s where I ended up at. Feel free to disagree and we’ll obviously see how it works out.

Anyways, on the bright side the debt is basically dealt with, so we shouldn’t be testing bankruptcy potential lows again which is nice. In theory dilution should be done besides stock comp for the foreseeable future, which is also nice. No financial headaches lets them focus on product and growth which seems to be their main competency area, so while slightly unfortunate handling, it happens and it could be worse.

AmEx Partnership:

The largest announcement of Q1 earnings was the AmEx partnership. To clarify:

1. CDLX will be doing offers for the entire domestic AmEx platform.

2. AmEx will launch on the new ad UI and server

3. The current belief is that they will handle a large majority of AmEx offers and potentially see existing AmEx ad relationships handed to them.

4. Based on the contract it appears that AmEx will not be taking a revenue share

5. AmEx offer program is probably anywhere from 50-100% of the size of Chase, who is >40% of CDLX.

6. There is no other card provider that had an internal offers system as robust as AmEx, yet they signed with CDLX.

7. Rollout will likely begin in Q4 by my guess with impact in Q1/Q2 of 2025.

Those points paint a pretty good picture assuming the current assumptions are vaguely accurate. Say they get 50% of AmEx offer volume and AmEx is 50% the size of Chase, that’s 25% of Chase billings in AmEx billings, but no revenue share. Say they do a 50/50 split between user and CDLX, that’s 12.5% of Chase billings as gross profit. Chase billings are ~$450m annually. So a solid $56m in incremental GP with minimal additional required OpEx.

At 20x that alone is worth more than the current EV and CDLX has the core business progressing as outlined above. Additionally it’s possible I’m underestimating the impact of AmEx as I believe it’s twice the size I’m estimating and CDLX will have a higher share than 50%. Lot’s of potential assumptions so the value can sway drastically, hence people being antsy about possible negative signals from management’s handling of the equity raise.

Net result is you get to make a bet on something that is rather unclear with no near term impact and management providing textbook negative signals. Great way to lose money generally.

I just think I’m right, but we’ll see if I get kicked in the teeth.

If AmEx works out as expected there’s also no reason for Citi/COF/Discover/etc to not partner with CDLX, which can provide more incremental scale and profit, while continuing to grow the core business and getting to be a multi billion dollar enterprise. Additionally the AmEx lack of revenue share and Chase cut of revenue share implies that equilibrium revenue share is probably pretty low for the banks as they work to compete on offer competitiveness. Very good for CDLX if so!

Going Forward:

CDLX is a bit tricky in the near term. As mentioned don’t expect much from AmEx this year until at the earliest Q4. A Q4 launch would be great, but timelines can be wonky. I doubt it gets stuck in limbo like the BofA upgrade given the change is likely part of an overarching overhaul at AmEx where CDLX happened to slide in and is actually a priority, but you never know.

Given the potential vast valuation attached to AmEx and total lack of context we will receive until they launch, this creates an interesting situation where potentially the entire EV is covered by an unknowable deal.

Given I think CDLX can probably get to $50m+ EBITDA in 2025 prior to AmEx just by growing a good 10-15% this year and the current EV of something like $750m, it isn’t too expensive even if AmEx is totally misunderstood. As a result unless the business is secretly imploding despite indicators it’s progressing, you get a decently cheap stock with a massive free call option at current prices. Obviously maybe we get some macro hiccups since some are nervous about war or inflation or what have you, but I’m generally of the opinion things work out in an overarching sense.

As a result I am long CDLX and will probably continue to be long CDLX. Hopefully Q2 has some revenue acceleration and hopefully we get more info on AmEx eventually so I know if I’m a dummy or not. Until then, we wait and watch the stock bounce around.

Cheers and I’ll do a CVNA article soon.