Ibotta what Cardlytics was supposed to be...

• Ibotta’s stock is down around 50% since its IPO in April. The company has exclusive partnerships with Walmart, Dollar General, and Family Dollar to white-label its technology on their platforms. It has also just announced a new partnership with Instacart.

• I believe the market is not recognizing the quality of this business and its future prospects and is extremely undervalued, trading at 10x TTM cash flow and 7x NTM cash flow. I also believe that many more future partnerships are in the pipeline, along with organic growth.

• Given my experience with Cardlytics, I see Ibotta as the company that will perform as I had expected Cardlytics to. I sold out of my Cardlytics position completely and bought a full position in Ibotta. I compare the two businesses and their differences, and why I believe Ibotta has a fundamentally better structure to ultimately succeed.

Company Overview

Ibotta was founded by current CEO Bryan Leach. The company was incorporated in 2011, and the app launched on both the App Store and Google Play Store in 2012.

It started as a direct-to-consumer (DTC) app where Ibotta got consumer packaged goods (CPG) brands to offer cashback rewards to everyday consumers who used the app. After several years of building relationships with over 2,500 CPG brands, Ibotta secured a partnership agreement with several smaller retailers to offer its robust cashback offers on its partners' websites. A major milestone was when the company announced a multi-year exclusive partnership with Walmart in 2021. This partnership launched for Walmart+ members in 2022 and expanded to all customers in the third quarter of 2023. In return for this partnership, Walmart received 12% of the company via $70 warrants.

In Q2 2024, the company announced:

“Subsequent to the quarter-end, Ibotta and Instacart entered into a multi-year strategic partnership to bring Instacart customers savings on their groceries. Ibotta-provided digital offers will be live on Instacart’s mobile app and website later this year.”

The CEO mentioned in the Q&A that they have not given the same economic terms to Instacart as they did to Walmart.

Business Model

Ibotta charges CPG brands to advertise using a pay-per-sale model, meaning brands only pay for promotions that result in a sale. This model allows brands to reach millions of consumers without paying for clicks, clips, or impressions. 

DTC app

Walmart integration

Here are some benefits of the Ibotta Performance Network (IPN) for CPG brands: 

• Reach: Brands can reach 91% of American households and more than 200 million consumers. 

• Data: Brands receive comprehensive data on sales, redemptions, and CPUM broken out by retailer. 

• Optimization: Brands can track and optimize performance in real time. 

• Anti-stacking protection: Brands are protected from stacking offers. 

• Return on ad spend: Brands on the IPN average a 7X return on ad spend (ROAS). 

• Incremental units sold: Brands on the IPN average a 50% lift in incremental units sold. 

• New-to-brand conversions: 42% of conversions on the IPN are new-to-brand. 

Ibotta's promotions are available on its app and sites from retailers such as Walmart, Family Dollar, and Dollar General.

How it works

Growth Opportunity

1. Grow Redeemers: Walmart, for example, has close to 120 million monthly website users, while Ibotta has under 10 million redeeming users. There is significant potential for growth in user redemption rates. In Q2, redeemers grew by 158% year-over-year.

2. Grow Budgets: As the platform scales and its reach expands, Ibotta can approach CPG partners to increase their budgets and target more users.

3. Expand into More Categories: As Ibotta grows and diversifies its reach, it can expand into more categories such as sports, electronics, outdoor products, and more.

4. Add More Publishers: With its recently announced partnership with Instacart, I believe we will continue to see more partnerships soon. It’s simple: why wouldn’t you want your customers to have the ability to save on everyday purchases? By not partnering with Ibotta, your competitor is offering discounts you are not, which puts you at a disadvantage.

Competitive Advantage

Network Effect / Economies of Scale: Ibotta benefits from a classic network effect. As their platform gains more reach, it becomes increasingly valuable for CPG partners to use the platform and expand their budgets. This, in turn, results in better offers, which drives higher redemption rates and further growth.

1P Data: The access to proprietary data Ibotta gets from its retail partners includes customer profiles, purchase history, and even specific product SKUs.

The Pros of the Business Model

Capital-Light Growth: Ibotta operates with a relatively fixed cost structure and doesn’t require significant capital to grow. For example, I believe the Instacart partnership alone could double the current business over the next couple of years without any meaningful investment beyond personnel.

High Gross Margin: The fixed-fee nature of the business allows it to achieve over 85% gross margin. It is a similar business model to Visa and Mastercard, which operate a network and charge a small but high-margin fixed fee.

Counter-Cyclical: This type of pay-for-performance advertising is highly effective but can be the most detrimental and dilutive to CPG brands. As Garry Friedman from RH said, “Pay-for-performance advertising is like crack; once you start, you can’t stop.” A wise man once told me, “What’s the problem with drugs? Because it works!”

Jokes aside, I can argue that as the economy weakens, this business should perform even better for two reasons: first, consumers are more likely to seek deals, and CPG brands need to compete for demand and counter private-label competition. Furthermore, as CPG brands tighten budgets, it becomes harder to justify using other channels over the guaranteed results this channel offers.

Why Publishers want to work with Ibotta:

From the Goldman Sachs conference on September 11, Yes. I mean, I would say that the fact of going public, the momentum from announcements like Instacart has catalyzed a lot of inbound interest in joining our network and made the response rate and uptake rate and urgency categorically different than before the IPO, which is really exciting. I think that these things tend to snowball because people are trying to remain competitive on price. And if you are looking at something like Instacart and you want to be a competitor, but you don't have offer content on these thousands or tens of thousands of items, you're at a disadvantage from a consumer experience standpoint. And you may, in some cases, even be coming out of your own pocket to do price matching, which you don't want to be paying for if you're at a large e-commerce retailer. Gating elements-wise, candidly, it's pretty boring approach sort of mundane things like, for instance, well, this is going to take 75 days and 3 engineers. So is that something I want to throw on my road map now when I already had these 7 items on my road map? Who moved my cheese kind of stuff, right? My cheese was here, my road map was here and now you're telling me got to drop this on the road map right now.

Or there might be a couple of instances where there might be a previous contract that's sort of being run out before they switch over to our network. But it's not -- I mean, I don't want to insult my sales team but it's not the world's hardest sale to say, "Hi, I have hundreds of millions of dollars to give to your customers at no cost to you.". So I believe that we will continue to grow our publisher ecosystem. And I think if you look at what's happened with Dollar General leading to Family Dollar, leading to other interests, I think you'll see these little sort of pockets of snowball effects. And that then, in turn, prompts the brands to want to invest more because, wow, now I have this opportunity to reach this exciting tech-savvy online grocery shopper, for instance. It's not as concentrated at Walmart and it also makes the business a little bit more predictable over time as well.

On how they landed Instacart: Yes. So let's take those in turn. I think to the first one, the genesis of the partnership, that's a fun one. I have an e-mail from June of 2014. I've just come back from a meeting with [ Apurva Neelam ] in South Park here in town and suggesting that they partner with us. And it took a decade basically of persistent staying on. Now admittedly, at that time, we are proposing that they take people off of Instacart, have them download the Ibotta app and participate over in this other app. It wasn't until several years into the -- it's fairly obvious now as you look at it, that, that isn't going to hunt. You need to create a white label version of this. And what's significant is they actually built a promotions business for a decade, and they are essentially transitioning that over to Ibotta as their preferred partner. So we are taking this off their hands so they can focus on selling carat ads and other things. And I think it relates to your second question because if you're in food delivery, for example, and you're considering, should I partner with Ibotta or should I build my own promotions business or, I guess, partner with somebody else? It's powerful to see that the sort of first mover and leader in this space, having built something for 10 years, nonetheless decided, you know what, let's recognize that Ibotta is really focused just on this.

And this is actually harder than it might have looked. Targeting offers is important. Measurement needs to be uniform, a set of uniform analytics tools. That's all they do. Whereas what we do is last-mile fulfillment and Caper Carts and ad sales, and let's concentrate on that. And I think it's critically important that they have the most offers for their customers because as they think about growth, they need to grow the addressable market of people who will use these services. And all of us in this room are affluent enough to pay for convenience, I'm guessing. But a lot of people, gosh, if I have a $60, $75 grocery bill and you want me to pay $10 to cover the convenience of delivery, that's an intolerably high price to pay. And so as you want to move into the fat part of the bell curve of the market, being able to offset that by $7, $8, $10 per trip through the content we provide is actually really strategically valuable, in addition to allowing their sales team to concentrate on, say, retail media. I do believe that this will send a clear signal to others in the delivery space, and we'll have to see how that turns out. But I am confident that as happened with Dollar, there will be a lot of attention on the opportunity that exists here.

Valuation

Financials

Street Estimates by IPO

Base Case: By 2025, I expect top-line growth of 20% as Ibotta continues to penetrate Walmart and expand its presence with Instacart. They should be able to secure larger budgets from their CPG partners. After 2025, I’m conservatively estimating 10% organic top-line growth, not factoring in any new partnerships.

The adjusted EBITDA margin to expand to 35%. In reality, this could potentially increase to nearly 45% as operating leverage kicks in.

I’m not accounting for the $300 million cash on hand, and I estimate that future cash flow and share buybacks will only offset SBC. (Over the same timeframe, the company should generate its entire market cap in cash)

EV/EBITDA: 15

Bull Case: By 2025, I expect top-line growth of 20% as Ibotta continues to penetrate Walmart and expand into Instacart. After 2025, I’m estimating 15% organic top-line growth, without factoring in any new partnerships.

The adjusted EBITDA margin to expand to 40%. Realistically, this could potentially increase to close to 45% as operating leverage takes effect.

I’m not giving any credit to the $300 million cash on hand, and I estimate that future cash flow and share buybacks will only offset SBC. (Over the same timeframe, the company should generate its entire market cap in cash)

EV/EBITDA: 20

Risks

Competition: The two main competitors are Rakuten and Fetch. These businesses only compete on the DTC side, and I believe they are at a competitive disadvantage in terms of scale and data. As standalone companies, if they don’t secure large partner agreements like Ibotta, it will be very difficult for them to compete against its scale and access to granular data. I also believe this is a winner-takes-all market.

Lumpy Revenue Growth: Part of the reason I believe the stock is down is due to inconsistent revenue growth and guidance. As I’ve experienced with Cardlytics, revenue can be lumpy since they rely on CPGs to update their campaign budgets, which are approved annually or quarterly. As a result, it's expected that lumpy revenue growth will continue going forward. From the Goldman Sachs conference on September 11, "I think, first of all, I would be remiss if I didn’t say that, as a public company, we’ve learned some lessons around how we can forecast our business and ensure that we are perceived as a reliable and predictable business by public market investors."

This makes me believe that they have already sandbagged guidance, as they understand the importance of meeting expectations. We should see more certainty in their guidance going forward.

Losing a Large Publisher Partner to a Competitor or Partners Trying to Do It on Their Own In-House:

From the S-1:

“The Walmart Program Agreement is a multi-year arrangement and automatically renews for successive twenty-four month periods unless either party provides notice of termination at least 180 days prior to the expiration of the applicable period. The Walmart Program Agreement can be terminated by Walmart with at least 270 days' notice to us (provided that Walmart cannot replace us during the then-remaining term of the Walmart Program Agreement with a digital offers program created by Walmart or a third-party), and may be terminated under certain circumstances, including for material breach by either party.”

I like to use the Buffett question to analyze moats: If you could give $1 billion to Ibotta's competitor in order to take away the Walmart partnership, would they be able to do it? They can't offer a lower take rate because Walmart doesn’t receive any partner share from Ibotta. They can't offer more deals, as Ibotta already has relationships with over 2,500 CPGs. All Walmart cares about is that their customers get the most savings possible. In my opinion, as long as Ibotta executes on its potential to grow redemptions and offers, it’s very unlikely to lose these existing partnerships. Furthermore, Instacart tried to implement its own rewards program over the last several years but ultimately gave it up to partner with Ibotta.

I see these partnerships as long-term licenses to print money, which are very hard to take away. I also believe this is a winner-takes-all market, and with Ibotta being the market leader with scale and momentum, they are clearly the frontrunner to secure many future partnerships going forward.

From the Goldman Sachs conference on September 11, “You said people didn’t expect us to do Instacart. Good, we’ve got more coming.”

I believe we will see many more partnership announcements soon.

The same is true for Cardlytics: advertisers prefer to deal with one party that has large scale. It’s difficult for any individual retailer to build relationships with thousands of CPG brands and monetize the data accurately. It makes much more sense for all parties to outsource this to a single entity to manage and control the entire network. Ibotta refers to itself as “The control tower of the rewards network” similar to how Visa and Mastercard operate.

Don’t get me wrong—losing Walmart would be a significant blow to the business. However, the Instacart partnership diversifies this risk and significantly increases the chances of securing other large partnerships, such as with Uber or Kroger.

As time goes on and the network expands, the value in these relationships shifts from the large retailers to the network itself, as the network is what creates value for all parties involved.

Execution: This is a significant risk, which I believe ultimately killed Cardlytics. While the platform has access to valuable data and a strong user base, successful execution is crucial to realizing its potential. Partners and CPGs want to see redemption rates grow and the user experience improve. I believe this business is in good hands with the founder-led CEO, who owns around 13% of the stock.

Cardlytics Comparison

Bank vs. Retailer Platform: Simply put, if you could only buy one company, which would you choose? Both sell coupons, but one operates in the "waiting room" of your bank, while the other operates at the entrance of your supermarket, right where you're about to shop.

Using Its 1P Data Outside the Publisher App: This is a significant advantage Ibotta has over Cardlytics. According to the S-1: “Our integrated retailers provide us with item-level data that is integral to our platform because such data helps facilitate a simpler redemption of offers on Ibotta D2C properties.”

Essentially, Walmart allows Ibotta to extract its valuable data outside of its own app and use it even within Ibotta's DTC app. You see where this is going—how will DTC competitors be able to compete with a platform that has access to bios, transactions, and SKU-level data? This also makes Ibotta more attractive to CPG brands, as they are guaranteed that one user won’t receive multiple offers from different platforms, which they can't see on any other channel.

In contrast, Cardlytics operates with more sensitive data, and their bank partners don’t allow them to use that data outside of the bank's app. Cardlytics can’t use data from Chase to inform ads on Amex, and certainly not for DTC purposes.

Economic Structure / Partner Revenue Sharing: Cardlytics has a revenue-sharing agreement with its partners, which used to be as high as 50%, though it has decreased over time. Ibotta, on the other hand, doesn’t share any revenue with its partners. coupons is a very tight volume business, where if revenue has to be split three ways between the Consumer, Cardlytics, and the partner—there’s just not enough for everyone to eat. The recent Amex partnership won’t involve revenue sharing, which is a positive development, but for Cardlytics to generate meaningful cash flow and solid ROAS, it will need all partners to forgo revenue sharing as well.

Bottom of the Funnel: Ibotta is at the bottom of the funnel; you are already on the Walmart website and ready to buy the product. All you need to do is click on the cashback offer before checkout. In contrast, with Cardlytics, you are entering your bank app, seeing an offer that might be attractive, and then needing to go to that third-party website or store. Ultimately, it's much harder to convert the sale.

Profitability: Ibotta and Cardlytics are generating similar amounts of top-line revenue, yet Ibotta is producing over $100 million in adjusted EBITDA and free cash flow, while Cardlytics is barely at breakeven.

Data Sets: Here, one could argue that Cardlytics has the advantage since it is card-based and can provide a seamless in-store experience linked to the card. In contrast, Ibotta offers a seamless online experience but has some friction in person. However, on the other hand, Ibotta has detailed SKU-level data, compared to the general-level transaction data that Cardlytics has.

Growth Rate: Ibotta is growing its organic top line much quicker, while Cardlytics is only expected to grow its top line with new partners like AMEX.

Larger TAM: I believe CPG in grocery rewards represents a much larger total TAM than card-linked rewards.

Founder-Led: As mentioned above, one company is founder-led with significant skin in the game, while the other frequently changes its CEOs and sells their stock compensation as soon as possible.

Ultimately, I think Ibotta is much better positioned to execute on its long-term prospects than Cardlytics. However, I can see how both could theoretically work out as well.

For one, Cardlytics is a channel where retail outlets like Starbucks, Lululemon, Alo, etc., can use to attract new customers into their stores, compared to Ibotta’s publisher business, which primarily drives traffic to in-store retail locations. Although they do directly compete on the DTC side.

The only way I see Cardlytics succeeding is if the following occurs:

1. They need to get all partners to agree to a 0% revenue share.

2. They need to revert to a pay-for-performance fee structure.

3. They need to work on a better platform for users and advertisers.

Summary:

I originally bought Cardlytics with the expectation that it could potentially become a capital-light, high-organic-growth monopoly cash machine. However, I am now realizing the significant challenges it faces in achieving this. On the other hand, Ibotta offers similar potential but is much further along in the process and is structurally better positioned to achieve this goal. While I will continue to monitor Cardlytics closely for any significant changes, including the AMEX launch, I feel more confident placing my investment in Ibotta for now.

On the other hand, Ibotta is currently trading at 5–7 times forward free cash flow while being able to grow the top line by 15%+ for many years to come without any meaningful CapEx, expand EBITDA margins to 45%, and has a free cash flow conversion of 120%. Furthermore, the company initiated a $100 million buyback several weeks ago.

In my opinion, Ibotta is a widely misunderstood business that has already inflected and will become obvious as they continue to execute. The market will see the top line and bottom line growth over the next several quarters.

From the Goldman Sachs conference on September 11, the CEO said,

“You may have seen that our company authorized a $100 million stock buyback. At this price, we’re buying the stock, and we feel really confident that it’s an excellent use of capital versus 5% interest just sitting there and growing.”

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