Will Criteo be a have, or have-not, ad-tech IPO?

Contact: Scott Denne

Ad-tech IPOs have had mixed results this year. While Wall Street has shown little inclination to get behind most ad networks, it’s been quick to reward high-growth companies with demonstrated technology chops. Which bucket will Criteo fall into when it starts trading?

Compare the 2x and 4x trailing revenue multiples given to YuMe and Tremor Video with the 11.6x given to Rocket Fuel. On the one hand, Criteo looks more like Rocket Fuel. The company posted $253m in revenue through the first half of 2013, up 72% from a year earlier. While that’s about half the rate Rocket Fuel grew, it is off a base that’s about twice as high.

The price Criteo pays for inventory – the empty slots where it puts its customers’ ads – could hamper its valuation. That cost is now 60% of revenue, up slightly from 56% a year earlier, and enough of a change to tip the profitable company into the red this year for the first time in at least three years.

Ad networks like Criteo and Rocket Fuel compete by offering customers the lowest prices for a desired outcome (typically, clicks on an ad). To offer lower prices, they can either build technology to lower their media spending without lowering the click-through rates, or they can swallow smaller profit margins on each ad campaign. Criteo’s rising media costs suggest it’s moving toward the latter camp, perhaps because its technological advancements may not be keeping up with competitors’ price cuts. Rocket Fuel, by comparison, is seeing its media costs shrink steadily, to 45% of revenue so far this year, from 51% in 2011.

Criteo last adjusted its proposed price range up to between $27 and $29 per share, which would give it a valuation of about $1.5bn, or 3x its last 12 months of revenue, were it to set a price at the midpoint of that range. When it becomes available to public investors, we anticipate the company will trade with a valuation multiple between 6x and 7x its trailing sales – higher than most ad-tech companies, but lower than Rocket Fuel – giving it a valuation between $2.8bn and $3.2bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.