Initially started as a research project in 1994 in Norway, Opera (NASDAQ:OPRA), via its browser that can be used on both a laptop or a smartphone, is now one of the architects of the future of the Internet. is the major stakeholder. Additionally, its strategy to increase the value of its user base by introducing adjacent products has delivered strong revenue growth since the Spring 2020 market crash. This contrasts sharply with a drop in the share price.
Now, in current market conditions where the tech stocks quoted on the Nasdaq, especially those with high-growth, as opposed to more value-oriented names or those with better profitability, my aim with this thesis is to highlight Opera’s margins, cash flow, Debt and Appraisal Metrics. For this purpose, I start by looking at the competition.
According to technology review website TechRadar, competition in the browser market is fierce. Thus, in order to maintain the market share, the major operators are continuously improving the product performance and coming up with rich functionalities. Also, in response to the increasing number of cyber attacks, they are responding with robust security features.
In this context, Google Chrome, held by Alphabet (NASDAQ:GOOG) has the leading market share because its interface is suitable for a wide range of users, but the browser is also viewed with some skepticism due to the personal collection of people and the potential for commercialization. goes. figures. This makes it a serious threat to data privacy, especially when used in conjunction with other Google services. Thus, people for whom privacy is important can turn to Opera as one of the reliable alternatives.
However, taking a deeper look at the market share, according to Statista, Opera has only 2.95% of the total browser market share as of December 2021, far behind Chrome’s 65%. Others such as Firefox, Apple’s (NASDAQ:AAPL) Safari, and Edge (from Microsoft (NASDAQ:MSFT)) are also well-positioned, with market shares ranging from 8% to 9%.
Still, despite this strong opposition, Opera is managing to grow, as it has added 74 million monthly active users (MAUs) over the past three years. The company currently has over 350 million MAUs.
Another notable metric is the 219 million Opera News average MAUs above. According to officials, Opera News is the number one news app in Africa and was launched during Q3 in several other countries in Europe and the US.
In addition, Opera News continues to grow in financial importance as ad sales from the news service now account for nearly half of the company’s total advertising revenue, along with the broader platform offerings. This follows 2% year-over-year growth driven mostly by AI in new phones and new markets around the world.
Revenue mix and profitability
Thus, third quarter 2021 revenue (as reported at the end of October 28) was a record $66.6 million, up 57% year over year and 11% higher than the previous quarter. Opera is also seeing its revenue mix skewed toward advertising, which now accounts for 52% of total sales, a trend that is expected to continue. As far as Search is concerned, sales grew 45% on a year-on-year basis. It was driven by benefits for both PC and mobile browsers.
Thinking out loud, the strategy of integrating its services vertically on top of its core product formed by the Opera browser, rather than competing against the firepower of the likes of Google, Microsoft, or Apple to scale horizontally It means a lot to this. Relatively short play. A strategy of direct confrontation could have given the company a higher market share than the current 2.95%, but, it required unbearably high sales and marketing expenses, or a strategy focused solely on growth that was detrimental to the profitability of many. has been Technical name.
As far as Opera is concerned, it’s spending $32.3 million on marketing and distribution to drive growth with SG&A in the third quarter, but that amount represents a slight decrease from the second quarter’s $35.3 million. Furthermore, despite the wildly volatile quarterly volatility, Operating Income (EBIT) has led on a net uptrend since March 2020 as shown in the orange chart below. The same has been the case with EBITDA.
On a more positive note, this browsing company reported higher gross profit of $63.3 million in Q3 due to cost of sales (including platform fees, materials and inventory expenses) amounting to only $3.3 million. These resulted in 95% of gross margin. As a result, in the event Opera faces higher levels of competition in the future, there is still room for the company to spend more on growth, without adversely affecting its profitability position.
Looking ahead, it can also count on its strong presence in Africa, where it continues to expand its offerings for mobile phones using its Opera Mini browser. Already boasting over 140 million MAUs in Africa, the continent represents considerable growth potential as there is a TAM (total addressable market) of 800 million users on that continent alone. In this regard, the company’s existing partnership with Google’s My Business should get a boost through a $1 billion investment announced by the search engine giant in October 2021.
Another action that should increase profitability is the monetization of O-Pay, a fintech service offering digital loans via Android applications, primarily in Africa, that traditional banking services cannot access.
Evaluation and Critical Findings
Thus, in July 2021, the company monetised its 29% stake in O-Pay, resulting in a profit of US$31.1 million. Monetization also had a favorable impact on third quarter net income which was $23.5 million. This was due to an upgrade in the valuation of OPay ordinary shares that had not previously been recorded at fair value.
On the other hand, operating cash flow was negative — $3.4 million, explained by the amount of — $27.96 million labeled as “Other Loss (Income from Long-Term Investments)” in the cash flow statement. Upon further investigation, I found that accounts payable after marketing costs peaked were attributed to a catch-up in balances payable.
This decline in cash flow has translated into a trailing value to cash flow ratio of 26.68x that underperforms the IT sector at 25.74% and scores a “C” in the SA’s valuation grade for Opera as shown below. Is.
Further investigation via a check in the balance sheet revealed that the company ended Q3 with cash and marketable securities totaling $193.2 million, or for non-operating items such as lease payments and development expenses. The latter ended the previous quarter with a decrease of $8 million. Nevertheless, total cash available exceeds $100 million from liabilities of $90.5 million, and at 2.65%, total debt to equity remains low.
As far as valuations are concerned, unlike the trailing values, the forward cash flow metric which stands at 7.26x scores A (table above). Now, that’s entirely possible with Opera’s core search and advertising sales as well as a business driven by strong sustained results from underlying seasonality. As a result, Q4 revenue is expected to be $70 million to $72 million, representing 41% year-over-year growth at the midpoint. More importantly, the company expects to benefit from the additional scale created during the year and continues to normalize marketing and distribution spend by customers.
As a result, with an overall valuation grade of A plus and a low price for multiples of earnings, Opera is a buy when its shares have fallen more than 50% since the beginning of 2021. It seems unnecessarily punished by the market. An increase in price rotation that has accelerated since mid-November. The recent sneaky surge amid tech selloffs, a sign that its better valuation metrics are finally being valued, and only 30% upward puts the stock at the $8.5 level based on its current share price of $6.5. Will give
Finally, with its high-margin search and advertising businesses including basic browser capabilities as well as the ability to monetize the fintech ecosystem, Opera is also exposed to gaming opportunities as part of the metaverse with its game maker studios. Must take advantage.