OPRA - Opera 2024: Projecting Growth And Strong Free Cash Flow

2023-11-10 12:27:59 ET

Summary

• While revenue growth rates face challenges, Opera Limited's strategic positioning suggests stabilization around a 20% CAGR.
• Opera's strategy emphasizes growing high-value users, particularly in Western markets, contributing to a sequential 2% increase in user numbers.
• With an attractively priced valuation of 14x forward free cash flow and an annualized dividend yield of nearly 7%, Opera presents an appealing investment opportunity.

Investment Thesis

Several people have reached out to me for a comment on Opera Limited (OPRA). Instead of responding individually, I've decided that it's time for an update on my view.

I'll get to the punch line first, and then you'll see the reasoning behind my assertion. I believe that Opera is attractively priced at 14x forward free cash flows. Even though the investment thesis isn't blemish-free, there's a lot to like.

What's more, given its annualized $0.80 dividend per share , which equates to nearly 7% yield, I believe this should further support my bull case.

Quick Recap,

Succinctly put, I previously summarized my position as such

The reason why I'm bullish on Opera has less to do with its growth trajectory and more to do with the underlying fact that this stock is cheaply valued.

Even though its recent results are far from blemish-free, I remain bullish on this stock.

Opera's Near-Term Prospects

Opera has evolved from an early web browser to becoming a multifaceted digital platform. Opera offers a range of browser products, gaming portals, content recommendation tools, and advertising platforms.

Opera's browser lineup includes flagship products for various devices, specialized browsers like Opera GX tailored for gamers, and innovative features such as Aria, a built-in browser AI service. Beyond browsers, Opera has expanded into gaming, and content delivery through Opera News.

From its Q3 results , we heard during the earnings call , of specific drivers, such as the integration of Aria, an internally developed browser AI, into flagship browsers such as Opera One and Opera GX.

Also, Aria's positive impact on user engagement and awareness and how that has contributed to increased search queries and page views. The adoption of Aria not only enhances user experience but also opens avenues for future monetization through informed recommendations, leveraging broadening context awareness.

In line with previous quarters, Opera remains focused on growing its highest-value users, with an emphasis on Western markets. And this is where the Bull case loses some of its steam.

As you can see above, Western Markets users are up approximately 2% sequentially.

Opera had stated that it would strive to allow a natural churn of non-Western markets, so it could double down its efforts to grow its Western users. However, this consideration doesn't appear to be gaining meaningful traction in the past couple of quarters.

Given this context, let's delve into Opera's financials.

Revenue Growth Rates Are Struggling for Traction

In my previous analysis, I said,

[...] the outlook for the remainder of 2023 is likely to see Opera's revenue growth rates dip into the mid to high-teens. Why is this a problem?

It tells me that Opera's strong growth rates, over the past 10 quarters, when Opera could be counted on to deliver premium revenue growth rates of more than 20% are now in the rearview mirror.

With Opera's newly updated set of results, my contention appears to be gaining validity. Even if Opera ends up beating its guidance, it's still likely to exit 2023 with a sub-20% CAGR. But that's not such bad news. Why? Think about it from this perspective. Opera was growing very fast in 2021. But against those high comparables, Opera's growth rates become more subdued.

But when we enter 2024, Opera's growth rates will be up against much easier hurdles.

This means that, in all likelihood, Opera should be able to stabilize its growth rates around 20% CAGR. Given this insight, consider what analysts have their consensus figures at:

Analysts are expecting Opera's revenue growth rates to continue compressing to around the mid-10s%. That seems to be highly unlikely.

OPRA Stock Valuation - 14x Free Cash Flow

To the best of my estimates, I believe that Opera probably manages to exit 2023 having produced $65 million of free cash flow. This implies that if we presume that this free cash flow grows by 15% in 2024, given that its top line is growing at around 15% to 20%, this would see its 2024 free cash flow reach close to $70 million.

This leaves this stock priced at 14x forward free cash flow.

The Bottom Line

Opera Limited stands as a compelling investment opportunity, with its current valuation at 14x forward free cash flows.

Despite facing challenges in its growth trajectory, Opera's strategic positioning as a multifaceted digital platform, encompassing browsers, gaming portals, content recommendation tools, and advertising platforms, positions it for sustained success.

As Opera continues to focus on growing its highest-value users, particularly in Western markets, the potential for monetization through informed recommendations remains promising.

The company's ability to adapt and stabilize its growth rates around 20% CAGR in the coming year, coupled with its attractive valuation, makes Opera a compelling stock.

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