Evolution: Evolving Into An Intriguing Opportunity

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Evolution, a leading iGaming company, has seen its stock consolidate since 2021 and its valuation compress to the current P/E of 16.High insider ownership and an impressive track record shows a strong...

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From 2021 to 2023, the company increased its revenues from €1.1 to €1.8 billion and its net income from €620 million to €1.1 billion. This has resulted in a significant multiple compression for the stock price, resulting in a current forward P/E around 16. For the full year of 2024, Evolution is expected to grow their revenue by 15%, considerable lower than the 36% growth during 2022. The growth is clearly lower than previous years, but so is the valuation. Evolution holds the largest market share globally and holds a 60% market share in Europe, which highlights the company as a true market leader. With an EBITDA margin around 70%, Evolution stands out as one of the most profitable players in the market. The company is currently repurchasing shares, and the relatively low net income growth could very well increase in the coming quarters as temporary problems get resolved. This is a growing and extremely profitable company with a strong MOAT, yet it only trades at a P/E of 17. A combination of multiple expansion and growth in both revenue and net income should send this stock higher in the years to come.   Share Price (Apple Stocks) Leadership Martin Carlesund has been CEO of Evolution since 2016, shortly after the company went public on the Swedish stock exchange in 2015. Since the IPO, the revenues have increased from €75 million for fiscal year 2015 to €1.8 billion in 2023. As a result, the stock has delivered over 5400% since the IPO. Martin Carlesund has transformed Evolution into one of Sweden's largest and most profitable companies. He currently owns 685 710 shares which indicates a strong alignment between him and the shareholder base. Jens von Bahr, who co-founded Evolution, was previously CEO but took the chairman role when Carlesund became CEO. Jens von Bahr and his co-founder Fredrik Österberg are currently Evolution's second-largest shareholders through their joint venture. Business Model Evolution is the leading B2B provider of the live casino market globally. Evolution describes its business model by the following, \"Evolution develops, produces, markets and licenses fully integrated Live Casino solutions to gaming operators. The gaming operators then market the products to their end users. Evolution’s customers include a majority of the most prominent online gaming operators worldwide, as well as several land-based casinos that have expanded online\". Evolution's most notable customers include Unibet, DraftKings and many more major players, which emphasizes that Evolution's solutions attract many of the most powerful gaming operators. Most of Evolution's revenue origins from commission fees and fixed fees for dedicated tables, which are both paid on a monthly basis by the gaming operators. The commission fee revenue is calculated as a percentage of the operators' winnings from their live casino offering. This implies that Evolution's revenue from commission fees, increase over time as the live casino market grows. Dedicated tables, fees, charges operators for the service of reserving a dedicated table to be used exclusively by the operator and can be customized completely according to the customers' needs. There are also other revenue streams such as set-up fees, however these are relatively insignificant when looking at the bigger picture. In other words, the vast majority of Evolution's revenue is reoccurring on a monthly basis.   Evolution AB One significant strength of the business model, that shouldn't be understated, is how asset light the business is. The largest costs are relating to personnel, facilities and production studios. This has allowed Evolution to rapidly scale up in new markets and to act quickly. However, the most significant strength, is Evolution's impressive MOAT. Evolution's fully integrated solution focus on entertaining the end-user rather than just earning as much money as possible. The entertaining value increase reoccurring customer's for Evolution's customers, which sets up Evolution's gaming operator customers as a preferred choice by the end-user. Therefore, a switch from Evolution's solution could be costly due to the need of creating a new fully integrated solution, as well as losing customers if it turns out to be less entertaining for the end-user. The role as the market leader makes Evolution's solution a branch standard, which means that customers often think of Evolution first when deciding on which provider to use. These factors clearly depict how strong Evolution's MOAT is, and how it continues to successfully defend its large market share. Financial Performance Evolution's most explosive growth is most likely in the past, due to the company reaching maturity. However, the growth in the coming years should still be better than most companies with similar market cap. The 2020 pandemic resulted in explosive growth rates for Evolution, which increased its revenue from €561 million in 2020 to €1.07 billion for fiscal year 2021. However, even after the pushed up demand from the pandemic started to diminish, Evolution continued to deliver explosive growth, with revenue increasing 36% in 2022 and 24% in 2023. This impressive growth was achieved while maintaining an even more impressive profit margin between 50%-60%. During the same period, the EBITDA margin has been just under 70%, which makes Evolution one of few companies that can achieve such high margins. The revenue growth for 2024 is expected to reach 15%, according to analyst consensus. This would mean a considerable deceleration in revenue growth, but should not be unexpected considering the company is in a more mature phase than previously. The analyst consensus also assumes a 15% growth rate for 2025 and a 14% increase in 2026. The net income is only expected to increase 4% in 2024, but is expected to increase at roughly the same rate as the revenue in 2025 and 2026. The difference between the net income and revenue growth is a result of margins taking a hit in the last quarters. The recent decline in margins is due to temporary issues such as the strike in Georgia and should therefore only be seen as a temporary headwind.   Simplywall.st The online gambling market, that Evolution operates in, is expected to grow at 11.7% CAGR from 2023 to 2030. This enables Evolution to continue its growth within its market, by only maintaining market share. In July 2024, Evolution initiated a share repurchase program that enable the company to buy back just over 20 million shares. This represents 10% of the shares outstanding, and 2.7 million shares have already been repurchased. Evolution's strong balance sheet enables the company to both proceed with the share repurchase program and to invest in new opportunities through M&A etc. In other words, the repurchase program won't prevent Evolution from making investments such as M&A. Risks In July 2024, Evolution employees in Georgia started a strike against the company and cited low salary, lack of respect for the employees and more as reasons. Georgia represents roughly half of Evolution's employees, and 4 out of 7 thousand Georgia employees participated in the strike at some point. The strike is currently ongoing; however, most employees have now returned to work, and only 400 are currently on strike. The strike seems to have cold down, at least temporary. However, the parties did not reach an understanding of new terms that they could agree on; hence new strikes should not be excluded as a likelihood. Due to the disruption caused by the Georgia strike, the Q3 results will most likely take a considerable hit, including the margins. Until both parties can agree on a more permanent solution, future strikes could happen and hurt Evolution's brand and, in turn, its customer relationships. This risk should not be understated, considering the high amount of Georgia employees, which highlights the significant dependence on Georgia. Another risk is the big exposure to unregulated markets, which makes the business vulnerable to future potential regulation in these markets. Asia is a big part of the unregulated market, and Evolution's revenue from Asia currently sits at 33% of the total revenue. On the other hand, there is also potential deregulation in some of Evolution's largest markets, which means that the regulation question can impact the business in both positive and negative ways. Regardless of potential deregulation or regulation, it implies uncertainty for the business, which adds risks to the investment case. Competitors are also a risk factor, which is a common denominator with all investments. However, Evolution has proven to successfully defend its market share against competitors through the years.   Quartr Valuation Evolution is currently trading at a forward P/E around 16. This seems cheap for a true market leader, which still presents relatively strong growth numbers. If we compare Evolution to similar companies, we reach the same conclusion of Evolution being undervalued. The competitor, Flutter Entertainment, shows similar revenue growth but much higher net income growth. Flutter trades at a forward P/E around 40, a large contrast from Evolution's multiple of 16. Flutter should trade at a higher multiple due to its more rapid earnings growth, but is a multiple more than twice as high really warranted? I believe a P/E close to 20 is more than reasonable for a business that is a true market leader as well as an asset light business with incredibly high margins. If the management succeeds in achieving growth around 15% in the next few years, a P/E over 20 is justified. Let's assume Evolution succeeds in achieving around 15% annual revenue growth until 2026 and grows their net income at a similar growth rate, excluding 2024 when the net income growth could fall short of 5%. Evolution should also be able to further decrease its shares outstanding through their current repurchase program down to at least 200 million. Considering that the current repurchase program enable the company to decrease its share count closer to 190 million; therefore, 200 million could be seen as reasonable if the stock stays at reasonable levels. In this case, the potential upside would be around 65% if we assign the business with a P/E of 21. A scenario where Evolution exceeds these expectations should not be seen as unlikely, in which case the potential upside would be higher.   Hypothetical Valuation (Authors contribution) Conclusion The market is currently concerned with multiple aspects of Evolution's business, whether it's the Georgia strike, the margin compression or the lower growth rates. I believe these concerns to be temporary headwinds, and as these issues get resolved, the sentiment around the stock should change. I wouldn't be surprised if the Q3 results surprise the market to the downside due to the Georgia strike; thus the shares could trade lower. However, the current valuation suggests limited downside even in that scenario, hence starting a position before and adding more after the Q3 report might be a successful strategy. However, in the next few years, the stock should increase as a result of multiple expansion and continued growth in revenue as well as net income.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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