Why Opera Limited Plunged Today

Motley Fool04-26

Opera reported earnings that showed mid-teens growth but missed on the bottom line. The company is investing heavily in a new AI cluster. The spending might make investors nervous, but...

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(OPRA -8.01%) were falling in Thursday trading, down 8.6% as of 2 p.m. ET.Opera reported earnings last night, and while revenue slightly beat expectations, earnings per share (EPS) missed. The company is spending heavily on a new artificial intelligence (AI) cluster, much like other big tech companies are. However, given the big spend on AI, some may have anticipated better second-quarter revenue and earnings guidance. Still, the stock looks quite cheap.Building an AI clusterFor Q1, Opera's revenue came in at $101.9 million, up 17% on the year and slightly beating expectations. However, EPS came in at $0.17, below estimates of $0.24. The shortfall was perhaps due to slightly higher expenses but also a much higher tax rate than the prior year. Even outside the income statement, Opera spent much more than some might have thought on its new AI data-center cluster located in Iceland, which ran the company's capital expenditures up to $20.2 million, eating up most of the company's operating cash flow. In the year-ago quarter, the company spent just $318,000 on capital expenditures -- next to nothing. Opera's management also guided for roughly $108 million in revenue in Q2, up 15% relative to the prior year, but for adjusted EBITDA margins to fall to between 22% and 25%. The midpoint is down from the 24.5% EBITDA margin earned in Q1, suggesting spending pressures on profits will persist. Meanwhile, some may have anticipated a quicker revenue acceleration from AI investment. Opera stock looks ridiculously cheapOpera's stock looks very cheap, trading at just around 13 times this year's earnings estimates and less than 11 times next year's estimates. Part of the discount could be due to the company's majority ownership by a Chinese investment consortium, but the company is still headquartered in Norway, where it was founded.Investors are clearly worried about whether the big spending on an AI cluster will result in better revenue growth and long-term profitability, or whether it's just a new cost of doing regular business. While that remains to be seen, Opera still generated free cash flow last quarter even with the spend on the new AI data center. And with mid-teens top-line growth, the stock looks far too cheap at just a low-teens-earnings multiple. 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