Opera: An Undervalued Small Cap
Summary
- Opera Limited has been able to deliver massive top line growth with solid margins, with almost no debt, which is impressive to me.
- The company is in line with current trends in AI and is responding rapidly to the changing software world.
- My valuation analysis suggests the stock is undervalued.
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Investment thesis
Opera Limited (NASDAQ:OPRA) is a fast-growing software company that is competing in a very tough web browsing business mostly. The management is striving towards improving profitability, which I believe deserves the attention of long-term investors interested in software companies. I consider the company's past years' strong financials, together with management's steps toward improving per-user profitability, as a good reason to look at the company closer as a potential buy. I also like how the company responds to the rapidly changing software world and introduces generative AI features to its products. Last but not least, my valuation analysis, together with my cross-check with Morningstar, suggests that OPRA stock is massively undervalued.
Company information
Opera Limited is a holding company incorporated in March 2018 in the Cayman Islands. The company does not have substantial operations conducting principal activities through its subsidiaries. Principle executive offices are located in Norway.
Opera Limited Form 20-F
OPRA has been a global internet brand in business for over 27 years. With a substantial user base of over 324 million average monthly active users in 2022, Opera has established itself as a notable player in the industry. OPRA initially gained recognition for its browser products but has since developed its offerings to include gaming products, development tools, AI-powered content recommendation products, and advertising tools.
The company operates in two reportable segments which include Browser & News and Other. Browser & News segment comprises 99% of the company's revenues and the segment has two major subsegments: Search and Advertising. The latter represents 57% of total revenues while the first is 42% of total sales and 1% for Other.
The company's largest business partner, Google (GOOGL), contributed approximately 45% of OPRA revenues in 2022.
Financials
The company went public on the NASDAQ stock exchange in 2018, so financials are available since FY 2016, thus it was the longest possible term I was able to dig down into.
The company demonstrated an impressive 20% revenue CAGR from 2016 until 2022 with the gross margin being stable and above 60%. In recent years Selling General & Admin expenses comprised a significant portion of the company's revenues since OPRA has been growing aggressively.
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The company's balance sheet is a fortress with very strong liquidity and almost to debt. To me, it is impressive that the company is able to deliver such strong growth and at the same time has a very conservative balance sheet. Considering such a strong balance sheet it is not surprising that the company is able to make good surprise to its investors like they did in January when they declared a special 80 cent per American Depositary Share [ADS] dividend.
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Opera Limited announced its latest quarterly earnings on February 27, delivering a beat both in revenues and EPS. Revenue of $96.3 million was the company's quarterly record and represented a 33% growth YoY. EBITDA grew 24% compared to the same quarter last year. These strong results are mainly due to better-than-expected monetization of the browser. Also what I believe is important is the fact that the company is now seeking better per-user monetization. Average Revenue Per User [ARPU] is an important performance metric for OPRA since it represents the average amount of revenue generated by each user. According to the company's latest reporting 20-F form, the OPRA is reallocating its resources from lower-spending South Asia to increase number of users in higher ARPU markets such as North America and Western Europe.
Opera Limited 20-F form
As we can see from the above table, the company more than doubled its' annualized ARPU during the last 8 quarters, which by far outweighed a decline in monthly active users [MAU]. So, it is evident that MAU was a very well-calculated and well-executed sacrifice.
During the latest earnings call, the management also provided guidance for the full fiscal year 2023. They expect a 15% revenue growth at the midpoint of their desired range and a 20% EBITDA margin.
Looking forward, what I like about future prospects is the fact that the company is keeping up with the industry and is working on new AI-powered features for its products. On March 22, Opera introduced generative AI tools in the Desktop browser and Opera GX. The company has introduced AI prompts that can be accessed from the address bar or by highlighting text and has added ChatGPT and ChatSonic to the browser's sidebar so that users can use these popular generative AI platforms. During the presentation Joanna Czajka, Product Director at Opera, said that users should expect more innovations from the company.
Valuation
OPRA does not pay dividends, except for a special one-off dividend which I mentioned above. Therefore, I use discounted cash flow [DCF] approach to value the stock. For WACC, I use Gurufocus projection which is currently at 6.5%. To calculate free cash flows [FCF], I need a base which would be consensus revenue estimates, which are available up to FY 2025, and then I implement a topline CAGR of 10%. To derive FCF I multiply projected revenues by the historical 5-year average levered FCF margin rounded up to 6% and expect it to widen by one percentage point yearly.
Author's calculations
After I incorporated all of the assumptions, I have arrived at a company's total fair market cap of about $2.7 billion which is almost three times higher than current market cap. The upside potential looks enormous, but I think that WACC is way too soft, so I would like to simulate scenario with WACC at 13%.
Author's calculations
After incorporating such an aggressive shift in WACC we can see that the model still suggests that there is more than 50% upside potential.
To cross-check my DCF I usually also refer to multiples analysis. According to Seeking Alpha Quant valuation section we can see that current valuation multiples are substantially below 5 year averages which also suggests undervaluation.
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To increase the level of my conviction in undervaluation I also refer to Morningstar Premium, which also suggests the stock is currently trading at a substantial discount.
Morningstar Premium
Overall, based on the DCF analysis and valuation multiples comparison to historical metrics suggest, the stock is significantly undervalued. This opinion is also supported by OPRA stock fair price estimation from Morningstar.
Risks to consider
Despite significant upside, investing in OPRA stock is also risky, which investors should consider when making decisions.
The company faces the risk that it will fail to maintain or grow its user base and increase the engagement of its users. OPRA operates in a highly competitive industry, and its ability to remain competitive depends on its continued innovation in providing products and services that meet the needs of its users.
Also, OPRA is exposed to risk related to the impact of global economic conditions, as these conditions may have an adverse effect on its business. This risk arises from the possibility of reduced demand for Opera's products and services during an economic downturn, which could adversely affect the company's earnings.
The next risk is the company's heavy dependence on Google, which accounts for nearly half of its revenues in 2022 and poses a significant risk to its operations. This dependency creates a vulnerability to potential earnings fluctuations, such as reduced revenue sharing or changes in the ranking algorithm, which could lead to a decline in user traffic and engagement.
These are the major risks that I see, all other significant business risks are available in the company's latest SEC filing.
Bottom line
Overall, I believe that OPRA's vast upside potential outweighs the risks of investing in the stock. Management has proved itself as a strong visionary with abilities to drive the company's growth and expand services reach together with improving per-user unit economics. I believe the stock is a strong buy for investors who have long-term mindset and high tolerance for possible short-term volatility.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (16)
I have been holding this for +1 yr now added recently. They have a large presence in African countries which is a good thing.
