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Small-Cap Confidential
Undiscovered stocks that can make you rich

Cabot Small-Cap Confidential Special Bulletin

One portfolio stock reports good earnings and another moves to Hold.

Cardlytics (CDLX) Blasts Off After Blowout Q3 Report. EverQuote (EVER) Moves to HOLD

This one feels good. There’s just no other way to put it. Cardlytics (CDLX) has developed a platform that marries banking and marketing data into a purchase intelligence solution that resides inside banks’ mobile and online banking channels. It’s one of those things I began to notice when I was logged into my Chase credit card account and found myself clicking on offers more and more over time. When I figured out the company behind the product, and that it was a small-cap software stock, I was in, hook, line and sinker.

So far, it’s worked out pretty well. Cardlytics is up nearly 30% today after trouncing Q3 estimates. Revenue grew by 63.2% to $56.4 million, beating estimates by roughly 13%. Adjusted EPS of $0.03 came in $0.17 ahead of estimates which is, frankly, a jaw-dropping beat made all that much sweeter because the company delivered its first profitable quarter. A major milestone.

Digging into the numbers most everything was very good. Billings jumped 70% to almost $83 million which is viewed by analysts as evidence that marketers are increasingly committing to this platform as more users come on board. Adjusted contribution, which is the chunk of total revenue that Cardlytics gets after deducting financial institution (FI) payouts, consumer incentives and third party data costs, was up 46% to $24.7 million.

Monthly average users (MAUs) were up 116% to 128.3 million driven by the Chase rollout. This should trend toward 150 million by mid-2020 as Wells Fargo rolls out (in phases over the next three quarters). Average revenue per user (ARPU) dropped 24% to $0.44 (analysts expected closer to $0.40), mostly because MAUs have gone up but these users aren’t used to the platform so they’re not using it, yet. They will.

On the conference call management talked about how they continue to focus on adding more industry verticals to the marketing platform, including travel, grocery, entertainment, e-commerce and more. And about how doing so requires careful targeting because users (i.e. you and me) don’t emotionally receive an offer from one brand in one vertical (for instance Whole Foods in grocery) the same way they do another (for instance Airbnb in travel).

This topic bleeds into another big business development topic; what Cardlytics is doing to automate its platform from what’s essentially a white glove campaign service for marketers now into one in which marketers can design their own campaigns that will perform better than any human designed campaign ever could. This will take some time, and analysts on the call were interested in how much it will cost to develop this automation capability, the timeline, and whether or not it makes more sense to build or buy/acquire the required tech. Management didn’t paint itself into a corner. This is a major initiative that will continue to differentiate this platform for years so I expect Cardlytics will be talking about progress and future plans on automation for many, many quarters to come. Right now, they are working on a pilot program and should update us next quarter.

In the meantime, the growth gas pedal is being pushed by marketing spend. Marketers are increasingly realizing that Cardlytics is on pace to hit 150 million MAUs next year and that means the platform will see roughly 50% of all card swipes in the U.S. That’s a huge amount of purchase data. By using Cardlytics’ platform marketers can better achieve the holy grail of the right offer to the right person at the right time. So more should come to the table, and increase spend over time.

That should add up to continued top-line growth for the company (accelerating from around 33% this year to 35% in 2020 and 2021, with upside potential) and long-term share price performance! That said, with a nearly 30% blastoff rally today I think the near-term upside potential is limited to 10% to 15% more. If that’s enough for you, feel free to add to your position. But for those who already have a full position I think it makes sense to stand pat for now and see how CDLX digests all the good news. Moving to Hold. HOLD.

EverQuote (EVER) Moves to Hold
Similarly, now that EverQuote (EVER) has exploded higher and had a little time to digest the rally, I think it’s wise to be a little conservative. Moving this stock to Hold. HOLD.