Opera Looks Fully Priced Before Q1 Earnings, Despite Its 11x Forward EV/EBITDA

seekingalpha04-19

Opera has demonstrated operating income growth and a projected 5.3% dividend yield, but risks still exist.The company's growth initiatives and product launches have boosted revenue and user base ...

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However, I believe the company still has an elevated risk profile arising from concentration risks that focus on a few revenue drivers and an opaque shareholder base, which explains why the company is trading at a forward EV/EBITDA of just 11x despite demonstrating operating income growth consistently for the past three quarters. Also, investors seem to be overlooking the projected 5.3% dividend yield, suggesting risks lurk on the horizon. Given the mix of risk and reward for Opera, I will recommend a Hold rating at the moment as I look forward to its Q1 FY24 earnings report next week. Opera laps a crucial 2023 heading into Q1 2024  In the full year FY23 earnings report, the Oslo, Norway-headquartered company, reported Q4 FY23 adjusted EBITDA of $27.8 million at a 25% EBITDA margin, ahead of midpoint consensus expectations of $23 million. For the full year, adjusted EBITDA grew 38% to $94 million on the back of a 20% increase in FY23 revenue to $397 million. Per my analysis, the browser company continued to benefit from a string of growth initiatives that they had laid out at the start of the year, as seen in the chart below, which gave a boost to their revenue. Opera's browser products are securing more revenue due to ads (FY23 Investor Presentation, Opera) In the first quarter earnings call last year, management spelled out a few high-level strategies, prime among them being integrating Opera's browser into devices manufactured by OEM device manufacturers such as PCs and gaming devices. This has allowed Opera to expand its ad inventory across browsers and other browser-related products, giving it the boost that can be seen from Advertising revenue on the back of its Ads Product Platform.          Advertising Revenue Segment Q4 FY23 Q3 FY23 Q2 FY23 Q1 FY23   Y/Y Growth 20% 24% 25% 26%   % of Total Revenue 60% 59% 57% 56%   Click to enlarge In addition, I noticed that Opera has been quite busy throughout the year, launching products and features all year. The company has launched a host of features, as can be seen in the slide below. Most of these features are either part of their flagship browser product, the Opera One browser, intended for a wide audience, or their GX browser, which finds relevance mostly among gamers all over the world. Opera's browser products and features (FY23 Investor Presentation, Opera) Moreover, Opera launched their own conversational AI chatbot, Aria, last summer, which, along with other feature rollouts throughout the year, has, in my opinion, given the company's browser product a boost in downloads, revenue, and margins. Opera's strategy has made some ground in market share and user acquisition I believe the list of product features that I listed earlier has been beneficial to Opera in terms of its user base expansion. The company's browser always had a relatively strong base among the emerging market population, in my opinion, due to the higher share of PCs in emerging markets. But the company has been working to increase its presence in the higher-margin developed markets that it calls 'Western Markets', which include MAUs (Monthly Active Users) in the North American and European regions. I have added a slide below that illustrates Opera's user growth in the Western and Gaming markets with my own annotations on CAGR growth. Opera's user growth over the past 5 years' worth of quarters (FY23 Investor Presentation, Opera with author's annotations) This is a good sign of strength for Opera in my view. However, at the same time, I note that Opera's share in the browser market has receded from a high of 3.3% seen in October to 2.5% market share, closer to the 2.34% market share number seen a year ago. If this trend continues, it is likely to put some pressure on Opera, as it appears the company's browser product is slightly losing market share to larger competitors such as Apple's Safari and Google's Chrome. Valuation multiples remain compressed due to concentration risks Before I headed over to valuing the company, I wanted to look at the risks because I noticed that the company has a history of trading at relatively low valuation multiples. First, let me trend the valuation multiples of Opera over time, as listed below. Trailing vs Forward EV/EBITDA for Opera (YCharts) I believe there are a couple of reasons that may be causing valuation compression despite the previous earnings beats. In my opinion, a large part of their revenue streams are due to users' online search needs on Opera's browsers. Currently, a revenue-sharing deal between Opera and Google ensures Google Search is the default search engine in Opera browsers. I've listed the trends below:         Revenue From Search 2022 2021 2020   Revenue generated from user's search activity on Opera 44.9% 51.3% 46.1%   Google's contribution to Opera's total revenue stream 42.3% 48.6% 51%   Click to enlarge The company is actively working to reduce its dependence on search and Google by expanding its ads business. Plus, their recent AI chatbot, Aria, should help with this at some point moving forward. On the last earnings call, management said that in the immediate term, Aria has delivered on its goal of creating awareness, but moving forward, they plan to monetize Aria by adding monetizable links and securing affiliate marketing revenue if users click through on those links. Based on my own personal checks, I believe the company is well positioned to monetize revenue from this channel within Aria, but I expect these initial revenue streams from Aria to be quite small as compared to total revenue since it is still in its early days for the product. Another possible concern is the structure of their current shareholders. An executive on the board has a significant controlling interest in the company, holding almost four-fifths of the company, which creates another concentration risk for the company. Such high concentrations from one Board member can create conflicts of interest within the company, in my view. Principal Shareholders in Opera (Form 20-F, Opera) Opera's Valuation and Outlook Based on my observations listed earlier, I lay out my assumptions for valuing Opera below:  Due to the lack of long-term operating models, I will use consensus estimates. I believe my assumptions also include the recent search partner deal extension between Opera and Google. I expect operating margins to be flat or slightly declining this year before reversing higher and closer to their FY23 margins of +16% on the back of continued gains in the higher-margin markets. A discount rate slightly higher than market expectations.  Opera's valuation shows the stock is priced in heading into earnings (Author) Based on these estimates, Opera looks to be growing operating income at ~16% CAGR while revenue grows ~14.4% CAGR between FY23 and FY26. These are strong growth numbers, but I believe it will be difficult to justify a forward PE for Opera that is north of 20x, given the risks and uncertainties I pointed out earlier, unless the company has a significant bump in its Q1 FY24 earnings and is able to sustain the momentum through the year. For now, given my estimates, I see roughly a -4-5% downside at current levels for Opera in my base case assumption as seen above. Other factors to look for Opera reports next week, and I will be watching for a few things listed below:  Sustained momentum in its ads business as well as continued penetration into the Western markets Any change in outlook in terms of monetization revenue from the AI chatbot product Aria? Any further positive commentary about its juicy dividends is currently projected at an annualized 5.3%. In the last call, I believe management did not signal hard commitments in dividend payouts, saying, \"We would like to be in a position where we can increase it and certainly not decrease it.\"  Specific tailwind commentary on how they will benefit from the EU's DMA regulation. Currently, Opera projects full-year adjusted EBITDA to grow 15.2% y/y in FY24 to $108 million at the midpoint, much slower than the 38% growth seen in FY23. This is expected to be achieved on the back of 15% y/y revenue growth in FY24 sales, which should be ~$457.5 million at midpoint.  Takeaway Opera has certainly demonstrated a resolve to take advantage of the AI tailwinds that they saw through last year. In 2023, they were able to take some market share from competitors, but those gains have since appeared to be given back. Certain risks remain, and the company will need a strong outperformance in Q1 FY24, while being expected to raise its outlook for the year.  At the moment, I rate this as a Hold.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428545748"}