Evolution AB: The Market Had An Unjustified Reaction

seekingalpha04-27

Evolution AB's stock dropped 6% despite positive Q1 2024 results, including increased leadership, double-digit operating income growth, and expansion in the US and Eastern Europe.Revenues in Europe ...

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Jon Feingersh Photography IncEvolution AB (OTCPK:EVVTY) plummeted about 6% at the release of Q1 2024, yet, in my opinion, the results were not so bad as to justify such a reaction. On the contrary, the company has increased its leadership, operating income continues to grow in double digits, and it pursues its expansion in the United States and Eastern Europe. Highlights Q1 2024   Evolution AB Q1 2024Total revenues reached €501.50 million in Q1 2024, up 16.70% from last year and 5.51% from the previous quarter. In every single geographical area there was growth on both a quarterly and annual basis, and in some cases it was quite fast:  Revenues in Europe reached €191 million, up 2.80% from last quarter and 10% from last year. For Evolution, this market has always been the main market, but in this quarter it fell to second place. Revenues in Asia have been growing so fast that this geographic area has become the most important one for Evolution. Revenues reached €197.60 million, up almost 9% over last quarter and 28% over last year.  In other countries, growth has been slower, but it has been there nonetheless. In particular, I expect North America's weight to be increasingly important in the coming quarters. Evolution has been trying to enter this thriving market for years, but it is not easy because of the countless regulations the company has to follow for every single state in the country. In the past three months the company has added a new client, Fanatics, and expanded its strategic partnership with Ceasars Digital, which includes a new studio in New Jersey. In addition, the company entered Delaware with its slot machine offering. In every single quarterly, there are continuing developments regarding expansion in the U.S., and sooner or later, I believe this market will prove to be prosperous for Evolution's coffers. We are still in an early stage.   Evolution AB Q1 2024Since Q1 2021 both revenues and EBITDA have been steadily increasing, and there has never been a quarter when this has not happened. Moreover, this growth is not happening at the expense of margins in fact, the EBITDA margin is at 69%. This is an achievement that is out of the ordinary and makes Evolution one of the most profitable companies in the world.   Evolution AB Q1 2024Operating margin was 62.10% in this quarter, slightly lower than in the past but still an excellent result. Just think that companies like Microsoft and Apple have an operating margin of 45% and 30% respectively. Driving revenue growth once again were live games, whose revenues reached €431.33 million, up almost 20% from last year. RNG revenue, or slot machines, generated €70.11 million and obtained marginal growth. When evaluating Evolution, the most important aspect is definitely the live games, as that is where the company's competitive advantage lies. Online slot machines are a saturated and fragmented market, which is why I would not worry about their almost 0% growth. What is important is that live games deliver strong results, and there is no doubt about that. By the way, there is important news in this regard:  Just as in 2023, Evolution will maintain the high-speed rate with which it introduces new games.  Stock Market, the newly released game, has been an instant hit. In Q2 the most ambitious game in Evolution's history will be launched according to CEO Martin Carlesund, namely Lightning Storm. In Q1 2024, 20 new titles were introduced in the RNG category.  A new studio was launched in Bulgaria, the one in Colombia is almost completed, and by the end of the year there will be a new one in the Czech Republic. In short, Evolution is expanding, and it is doing so without affecting profit margins and growth.   Evolution AB Q1 2024The staff is starting to get large, and compared to last year there has been an increase of 18.50%. This is a sign that demand for its games is high and the company is doing what it can to meet it. Finally, let's take a look at the financial position and cash flows.   Evolution AB Q1 2024High profit margins allow the company a substantial amount of cash inflows each quarter. Operating cash flow - calculated as cash flow from operations minus cash flow from investing - exceeded €250 million. Thus, more than 50% of revenue was turned into cash. This is an outstanding result and makes Evolution a financially sound company; in fact, cash (€974 million) far exceeds total non-current liabilities (€404 million). But there is more. More than 90% of the profits earned in 2023 returned to shareholders through dividends and buybacks. The former amounted to €2.65 per share, while the buyback - now completed - was €400 million. As explained in my previous articles, Evolution distributes at least 50% of its profits each year, making it an excellent dividend growth company. Conclusion Q1 2024 was a positive quarter as Evolution continued its expansion, kept margins high, and revenues grew by almost 17% compared to Q1 2023. Frankly, I do not understand the reasons behind the 6% drop, which is why I continue to rate this company as a buy. Compared to my previous articles on Evolution, my investment thesis remains unchanged, and I believe that this company can be a great investment over the long term. The fact that it is not listed in the U.S. I believe penalizes its valuation, as few people know about it yet. Also, operating in the controversial gambling market, some investors prefer not to invest in it due to a purely ethical choice, or out of fear that new regulations will negatively impact the company. These are all understandable reasons; in fact, this is by no means a risk-free investment. As far as I am concerned, Evolution will continue to have an important position in my portfolio, possibly for many more years.   Seeking Alpha Dividend growth in recent years has been exceptional, and I expect it to continue, albeit at a slower pace. Finally, the current Market Cap/ NTM Free Cash Flow is 19.71x, which at first glance may seem high but in my opinion is not. This company is growing by double digits, has profit margins that few in the world have, and is a leader in its market. In other words, a medium-to-high multiple is more than justified.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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