Opera: Earnings Call Will Most Likely Focus On The Digital Market Act

seekingalpha04-22

Opera's stock surged over 25% following its Q4 earnings report but has since declined due to market conditions.The company's advertising business saw a 20% YoY increase in sales, driven by monetizing ...

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Since then, shares have moved lower, mostly as part of the broader market impact following a hawkish Federal Reserve. It trades at a high price-to-sales multiple, but revenues growing at double digits indicate progress on monetization and uptake of the Opera GX browser used for online gaming. Data by YCharts Bearing in mind that the first quarter 2024 (Q1) results are expected around April 25, this thesis makes the case for a buy thanks mainly to the European Union's DMA (Digital Market Act). I start with the advertising business, which despite seeing a modest increase in MAUs or monthly active users to 313 million, expanded sales by an impressive 20% YoY thanks to browser monetization. Progress On Monetization Despite Strong Competition In Online Ads And Games  First, the $396.83 million in revenues harvested in Q4 not only represented a robust 17% YoY rise but also exceeded consensus estimates and was achieved by leveraging the user base of the Opera browser to expand the advertising business, which grew by 20% YoY as mentioned earlier. This is a significant achievement, because of fierce competition with the emergence of the AI-powered Bing search engine by Microsoft (MSFT) in a market dominated by Alphabet's (GOOG) Google. However, the search giant managed to grow its advertising business only by 11% YoY during Q4. To explain Opera's better performance, in a marketplace where users are constantly being bombarded with ads, it has seen success by offering security and privacy features like built-in VPN and ad blocker features respectively. In this way, it has harnessed the power of personalized ads, now augmented through the use of Aria, its AI Chatbot for users to interact with to obtain customized solutions. www.opera.com Additionally, by positioning its Opera GX for online gaming since June 2019, with a user base of 27.8 million, the annualized revenue run rate reached $100 million in Q4. Now, since this is a market that is anticipated to reach $9.5 billion in total sales by 2033, there is a lot of scope as even if app-based games (or those that one plays using an iPhone or Android phone) can provide a more immersive experience, browser-based ones (like Opera GX) are quickly accessible through a URL and do not require any prior download. Thinking aloud, its ability to raise market share despite facing giants is analogous to operating a niche market and could get a boost from the DMA, an act that calls for big tech to open up their platforms to competition Tailwinds From The EU's DMA Now, given the monopoly status that Apple (AAPL) enjoys with its Safari browser or Alphabet with its Chrome browser since these are provided by default when someone subscribes to a mobile phone plan, any change whereby 400 million Europeans get to choose what is installed on their phone to connect to the internet creates a more level playing field for pureplay browser companies including Opera. For investors, Apple and Alphabet bundle their browsers for free with their operating systems, and, in exchange, can track which websites consumers visit to ultimately sell them adverts. press.opera.com Thus, it comes as no surprise that according to a survey on March 6 or one day before big tech had to comply with the provisions of the DMA, 83% of mobile device users across Europe were open to testing a new browser. This is a lot, and more recently, a survey by Reuters indicated that many were switching away from Apple's Safari in Europe where the company commands a larger market share than Google's Android. This switch is benefiting smaller browsers like Aloha, Opera, DuckDuckGo, Ecosia, and Vivaldi. Now, one of Opera's advantages is that it is offered as part of Apple's download list, in all 27 European countries. Also, it makes use of Google's search engine, which is also the case for Safari, meaning that those who switch to Opera will not lose in terms of internet searching capability while benefiting from VPN and privacy-oriented features that disable invasive ad-targeting. Thus, empowered by DMA-related benefits, the company could beat fiscal year 2024's revenue consensus estimates of $457.44 million, which is based on 15.28% YoY growth. Assuming a growth rate of 20% for 2024 (which is the rate of growth of the advertising business), I have a new estimate of $476.16 million. This translates into a price-to-sales of 2.56x which is lower than the median for the sector of 2.69x, which represents an undervaluation of 5% ((2.56-2.69)/2.69)). Revenue Estimates (seekingalpha.com) However, the price action is also determined by the momentum factor where Opera obtains a grade of B. Therefore, as was the case on February 29, the shares could surge by around 25% in case the company can beat topline expectations as has been the case for the last six years in a row. Thus, based on a 25% appreciation, I have a target of $17.43 (13.95 x 1.25) based on the current share price of $13.95. To further justify my optimism, the company reported a 164% jump in new EU users switching from Apple devices on March 23. Furthermore, this target is far from the $28 peak reached in July 2023, after a vertiginous upside triggered partly by the DMA's enactment on November 1, 2022. Ownership-Related And Rate-Sensitivity Risks But Strong Profitability Subsequently, the stock plunged to the $10-$11 level, partly caused by a mixed shelf offering involving shareholders selling around 141.7 million shares in the open market. Now, given the problem of share concentration, namely with the Chairman and the CEO holding a combined 79% stake, this offering should have been welcomed by the market as it increases the public float, also paving the way for more institutional ownership and possible inclusion in equity indexes. However, the market's adverse reaction shows investors were not convinced, possibly because of a lack of details as to the reasons for the equity sales. For this matter, the company already held $93.9 million of cash on its balance sheet versus $10.5 million of debt at the end of Q4, implying no immediate need for financing. Therefore, one can expect further volatility in the case of another offering, depending on investor sentiment. Moreover, this is also a rate-sensitive stock, since it pays dividends equivalent to a yield of 5.73% on a trailing twelve-month basis. As such, it competes with treasury bond yields, which go up when there is a higher probability of the Fed keeping rates higher for longer. However, for those prepared to take risks, Opera is a nimble company that can adapt to the ever-evolving digital landscape, as shown by its profitability. Here, the adjusted EBITDA margin of 24% for FY-2023 came 4% above what was guided initially despite growing rapidly in a highly competitive environment. This means the ability to control marketing expenses and grow organically. To this end, the profitability grade of A+ with a net income margin outclasses the sector median by nearly 1500% as shown below. seekingalpha.com However, on a cautionary note, with the cash dividend payout ratio of C+, and lacking in dividend consistency, one should not buy the stock solely for the income, but more for the growth opportunity. Margin Gain Prospects For FY-2024 And What To Look For During The Next Earnings Call With the DMA aiming to combat the anti-competitive practices of big tech and correct the imbalances created in the wake of their years of domination of the European market, companies like Opera should benefit significantly. The reason is that both through network effects and their vast ecosystems to acquire and lock in consumers, major players have built monopolies, leaving little room for competition. In the same breath, the fines imposed by the European regulators following the abuses of a dominant position were not sufficient to effectively regulate the digital market as they often came too late, after lengthy investigations. Thus, regulators reigning in to achieve browser democratization is resulting in leveling the playing field and fairer competition between digital players, particularly for the benefit of smaller ones. Moreover, while the focus tends to be on the MAU, success also depends on the ability to rapidly monetize the customer base, an area where Opera excels after seeing its ARPU (average revenue per user) climb by an impressive 22% YoY in Q4. This figure was achieved by additional high-ARPU users in North America, Europe, and Latin America managing to offset low-ARPU ones in emerging markets. Now, just think of the ARPU or profit potential that can be derived by Opera increasing its market share in the high-value European market. This should be favorable to the EBITDA margin, and, with a forward EV/EBITDA ratio, Opera is underpriced relative to the IT sector by 24%, which is near the 25% upside backing this bullish thesis. Valuation metrics (seekingalpha.com) Therefore, in addition to revenue growth, it is important to look for the EBITDA margin guidance for this financial year during Q1's earnings call. This should in turn positively impact the EPS for FY-2024, which according to the current analyst consensus currently stands at $0.97. Investors will note that since DMA compliance took effect on March 7, related sales should not impact Q1's results meaningfully and this is the reason I have focused on the long term or this financial year.  Finally, Q1's earnings call will most likely focus on the DMA, and, as more users join the Opera ecosystem, the company can also benefit from margin gains, notably by building on its customer base to expand into other industry verticals like Fintech, where it already offers blockchain-based wallet services.","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/2429910798"}