OPRA - Opera: Fundamentals Remain Strong

2023-12-15 05:36:08 ET

Summary

• Opera once again beat and raised guidance with its Q3 results.
• The company is attracting higher-ARPU users in developed markets and benefiting from its Aria AI.
• OPRA's stock currently appears to be trading more on technicals and chart patterns than its valuation and operating results.
• Longer term, OPRA's stock looks attractively valued given its strong growth.

Back in June , I placed a "Buy" rating on Opera (OPRA), noting the company's shift to focus on higher-valued users and developed markets. I followed that up in early October, saying the company was showing good traction and looked poised to continue to beat and raise for the rest of the year. With the stock down over -30% since my initial write-up, let's catch up on the name.

Company Profile

As a reminder, OPRA offers an assortment of PC and mobile web browsers, including Opera Mini, Opera for Android, Opera for iOS, GX Mobile, and Opera GX, and Opera. Its Opera GX browser is its fastest growing and it geared towards gamers, allowing them to customize their browser to optimize their gaming performance. The company also has gaming portals and development tools, an ad platform, news content recommendation products, and Web3 and e-commerce products and services.

Over half its revenue comes from advertising, where it delivers ads on its browsers and other properties. It also has revenue-sharing agreements with Google (GOOGL) and other search engines when users use one of its built-in search bars.

Q3 Results

OPRA shares got a nice lift after it reported its Q3 results towards the end of October, rising over 11% the session after its results. However, the stock has not been able to keep its momentum since then.

For the quarter, OPRA grew revenue 20% to $102.6 million, topping the consensus of $99.7 million.

Advertising revenue jumped 24% to $60.8 million, driven by the expansion of its Opera Ads platform and monetization efforts for mobile and GX browsers. Search revenue climbed 15% to $40.8 million, driven by its focus on Western markets. Technology licensing and other revenue rose 22% to $1.0 million.

Number of monthly active users (MAU) fell sequentially by -5 million to 311 million. The loss of users came from lower-ARPU users in emerging markets, while more-profitable users in North America and Western Europe grew. The Opera GX browser saw users rise 10% sequentially to 26.1 million MAUs from 23.7 million MAUs in Q2.

ARPU rose 24% year over year to $1.31 and was up 12% sequentially from $1.17. Opera GX ARPU rose 33% year over year to $3.29.

Operating expenses rose 25% to $86.6 million.

Adjusted EBITDA came in at $23.8 million, up 11%. It generated $16.2 million in operating cash flow in the quarter, and $13.4 million in free cash flow. Earnings per ADS was 18 cents, while adjusted ADS was 20 cents when adjusting for impairments and non-recurring expenses. Analysts were looking for earning per ADS of 17 cents.

Turning to the balance sheet, the company ended the quarter with $83.5 million in cash and no debt.

Looking ahead, OPRA raised its full year revenue guidance to $394-$397 million, up from a prior outlook of $380-$390 million, representing 19.5% growth at the midpoint. It took its full-year adjusted EBITDA guidance to $88-90 million, from a prior forecast of $80-84 million.

For Q4, OPRA is expecting revenue of between $110-$113 million, representing 16% growth at the midpoint. That's up from implied guidance of $102-109 million. It is projecting adjusted EBITDA of between $22-$24 million, up from implied guidance of $19.3-21.3 million.

Discussing its AI initiatives on its Q3 earnings call , Co-CEO Lin Song said:

"Opera One also lets you do more with AI with less time with minimum technical skills and less effort. Aria comes with a set of tools that allow you to easily refine your queries and create content with a set of predefined prompts. You can further personalize Aria with the My Style feature that lets you train your browser AI to write like you. It's never been easier to write long pieces of text from insightful reviews to eloquent e-mails or stern complaints, all in your unique style of writing. Being able to effectively interact with AI is quickly becoming an essential skill in life. Aria lets people easily and quickly get what they are looking for, whether it's search for information or creating a piece of content. So Aria has proven to be a hit with users and they are clearly enjoying the experience as evidenced by a lift in increased search queries and page views position. Still we are only getting started. And the world is only getting to get used to take advantage of the new technology. We look forward to keeping you posted on our Aria milestones as we see this grow in richness, awareness and the capabilities. Today, we maintain Aria indirectly, both in terms of attracting yield results and increasing our users engagement, which in turn benefits our existing search and advertising partnerships. There is no need to restructure those deals to benefit. Looking ahead, we are excited about how Aria's useful features can directly translate to monetizable informed recommendations fueled by a broader context awareness."

OPRA turned in another strong beat and raise quarter in Q3, in line with my thesis on the name. Unfortunately, this hasn't led to stock gains since my initial write-up, but it does show how well the business has been operating. The company is doing a great job of connecting with and growing higher-ARPU users in developed markets, which is continuing to drive advertisers to its platform and push up ARPU. Its Aria AI, meanwhile, has been driving search inquiries, also benefiting the firm.

The one knock on the quarter was that operating expense growth did exceed revenue growth. Gross margins have been trending down with the advent of its Opera Ad platform, but incrementally, the ad platform still adds gross profit dollars. Nonetheless, operating expenses is something I'd like to see kept in check a little more.

Valuation

OPRA currently trades around 10.9x the 2023 consensus EBITDA of $84.6 million and 9.0x the FY25 consensus of $101.6 million.

It trades at a forward PE of 12.9x the 2023 consensus of 87 cent and 11.5x the 2024 consensus of 97 cents.

The company is projected to grow revenue nearly 20% in 2023 to $396.1 million, and 14.8% to $454.7 million in 2024.

There are no great public comparables to OPRA, and its historical valuation isn't much help either.

Given OPRA's momentum and the return of growth in the ad market and some benefits from pre-installations, I could see OPRA doing close to $460 million in revenue in 2024 and maintain its 23% EBITDA margins, taking it to $106 million in EBITDA. Place a 15-20x multiple on that given its growth, and you get between a $17-25 stock.

Conclusion

OPRA has been doing a great job of attracting higher ARPU Western users to its platform, powered by its gaming centric Opera GX browser, as well as its AI-powered Opera One browser. This combines with what looks like a rebounding ad market, as evidenced by recent social media and search provider earnings momentum, should bode well for the company going forward.

Following its sell-off, OPRA's stock currently looks attractively valued given its growth outlook. I continue to rate the stock a "Buy," and I have placed a $21 target on the stock.

The biggest risks to the name are a pullback on ad spending due to the economy, rising expenses with Aria and AI, and a slowdown in adding new Western users.

I also think much of the recent pullback is due more to technical trading versus OPRA's results or valuation. With this you'll see technical traders shorting the stock based on its chart patterns as opposed to its fundamentals. This could continue to be a temporary headwind.

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