Why Criteo S.A. Stock Fell 14.8% in September

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What happened

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Shares of Criteo S.A. (NASDAQ: CRTO) stumbled by 14.8% in September, according to data from S&P Global Market Intelligence, after a noted short-seller accused the advertising retargeting company of fraud.

More specifically, short-selling specialist Gotham City Research issued a scathing report last month in which it alleges more than half of websites using Criteo "are of suspect quality," while further arguing the company regularly "takes credit for clients' sales it did not contribute to, and in some cases, that never actually occurred." 

So what

Gotham City Research also suggested that Criteo tends to target "less sophisticated clients" as larger advertisers are increasingly requiring greater transparency and that average revenue per users is declining as a result. It also argued that Criteo's clients could cut at least 50% of their spending with the company without negatively affecting sales. Finally, Gotham pointed out that Criteo hadn't directly disputed its claims, effectively equating its near-term silence with an admission of guilt.

To be fair, Criteo has issued statements to multiple inquiring media outlets to refute "a number of unsubstantiated and false claims" within Gotham City Research's report. For one, Criteo pointed to its over 90% customer retention rate as evidence that its "system not only provides real value for our clients but sets the global standard."

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"Ensuring high traffic quality is a key component of Criteo's business model," it said. "Criteo regularly conducts external audits with renowned third parties on its traffic which do not correlate with the accusations of Gotham City's report."

Now what

Criteo also pointed out that Gotham City "failed to seek clarification from Criteo regarding any of the facts and assumptions related to Criteo's business model before writing the report" -- a comment that suggests it could have had answers at the ready before Gotham City leveled its serious accusations against the company. For what it's worth, I'm not convinced that Gotham City Research was particularly anxious to consider Criteo's side of the story.

For now, I tend to want to give Criteo the benefit of the doubt, especially considering its perennially high customer retention with more than 16,000 clients as of last quarter. But our market hates uncertainty, and it was no surprise to see shares fall in response last month.

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