OPRA - Opera: GX Is A High-Potential Product

2023-12-23 02:51:48 ET

Summary

• Opera GX browser has a high user base growth rate but a low penetration rate, indicating room for further growth.
• Opera's focus on the gaming community with the GX browser has been successful and has the highest average revenue per user.
• Opera has a stable organic profitability profile and is projected to have strong revenue and EBITDA growth in the coming years.

Investment thesis

Opera (OPRA) GX browser, coming to the market in 2019, was a breakthrough for the company. Despite GX's consistently high user base growth rate in 2020-2023, the current penetration rate is only ~6.5% of the target audience, which will allow the company to maintain a high user base growth rate. At the same time, elevated GX ARPU's will support both revenues and EBITDA growth rates in the middle term.

Revival of the brand

Opera was founded in 1995 and has been developing and promoting a web browser. Until 2000, the software was delivered as a trial version and it was assumed that customers would buy the full version after a trial period. However, since version 5.0, the browser offered a conditional free version where users were monetized through banner ads.

As a large number of advertisements were subject to criticism, banners were abandoned in 2005, and the main income of the company came from partnership with Google (GOOG) (GOOGL), as their search engine was used in the default browser. Meanwhile, the company also launched browsers for cell phones.

Key changes began to take place after 2016, when the browser was taken over by a group of Chinese investors . The business was split up - the remaining divisions within the parent company were renamed Otello Corporation ASA.

In 2017, the company launched a new product - Opera Neon browser with an alternative design, in 2018 - Opera News, an AI-based news agency primarily targeting African audiences, and an updated version of the Opera Touch mobile browser. The new products enabled the company to launch a new IPO with a valuation of ~$115 million.

After raising funds, the company began a cycle of M&A, acquired several startups, and launched new products :

• In 2019, the company launched the Opera News Hub platform, a service designed to help bloggers create content.
• In 2020, the company acquired Estonian fintech startup PocoSys , which develops software for banking services.
• In 2021, the YoYo Tech division was bought out from the Playtech Group and entered the Opera Gaming segment to promote the development of browser-based games in the company's new Opera GX product. From a browser for the general public, the company switched to a gaming audience.
• Meanwhile, Opera launched the Dify project - a payment plugin with a digital wallet and cashback on partner websites.

Obviously, it's hard to compete with big publishers like Google or Microsoft (MSFT) as a regular browser, as Opera's ecosystem is not that developed. Nevertheless, the company has found its target audience in the gaming community. The relatively free market and the uniqueness of the product allow Opera to maintain a high rate of growth in the number of users and increase revenues.

Opera GX is a value driver

Opera GX is a browser with a focus on the gaming community. Among all the company's products, GX was able to fit the niche most successfully. List of several unique features of the product:

• Limitation of used PC resources for better performance in games.
• Built-in Discord, allowing you to chat through the app directly from the browser.
• Extensive design customization options.
• Built-in AI based on ChatGPT Aria.
• GX.Store and GX.Games stores that give you access to purchase games and digital content.

The browser was announced in June 2019 and currently has 26.1 million active users and high user ratings, with an average of 4.3-4.6 on a five-point scale.

According to Statista , the PC gamer market is ~1.8 bn people, i.e. almost 45% of the total number of global internet users. According to management calculations and Lab 42 survey , the company's total target audience is around 400 mln people (excluding China). That is, despite the high growth rate of the user base in 2020-2023, the product's penetration rate is currently less than 7%, which suggests that the company still has room to grow in terms of the number of users.

We assume that the number of users can grow to ~55 mln by the end of 2025.

Our assumptions are also supported by Google Trends data, as GX search interest remains stable over time and the browser is very popular all around the world.

Among all products, GX has the highest average revenue per user, which will also enable the company to maintain high revenue and EBITDA rates.

Today, the GX audience accounts for only 8.4% of the total number of Opera users, but even despite the low share and conditionally free distribution model, the average revenue per user has almost tripled in 4 years. We assume that as "cheap" Opera Now users are replaced by active growth of GX audience, the company will be able to maintain ARPU growth rates at the level of 15-20% per year.

Thus, we assume Opera's revenue will be $397 mln (+19.9% YoY) for 2023, $466 mln (+17.3% YoY) for 2024, and $536 mln (+15.2% YoY) for 2025.

Stable business profitability

Despite its relatively small company size and user base, as well as constant product updates, Opera has a fairly stable organic profitability profile. Unlike many IT companies, employee compensation in the form of stock is not the only reason why Opera is a profitable business.

According to AltIndex, Opera has only about 606 employees and a quarterly salary budget of about $19 mln, of which $2 mln is stock-based compensation. Given the active development of the gaming business, we assume that the staff will increase and the salary budget will grow by an average of 13% per year.

Marketing costs increased significantly in 2020-2021 with the launch of GX as Opera launched a massive advertising campaign to promote the product, but the budget was reduced in 2022. According to the company, 73% of new users come organically, 12% through paid marketing initiatives and 14% with the purchase of a device with pre-installed software. We assume that Opera's marketing policy will continue and the budget will grow in proportion to revenue in the future.

Other costs, which include consulting, licensing, rent, travel, etc., are also stable and average $4-5 million per quarter or 4.5% of revenue.

We project GAAP EBITDA of $80 mln (+32% YoY) in 2023, $97 mln (+21% YoY) in 2024 and $124 mln (+28% YoY) in 2025, and adjusted EBITDA (net of dilution) of $89 mln (+31% YoY), $103 mln (+15% YoY) and $131 mln (+24% YoY), respectively.

Valuation

For valuation purposes, we use an industry EV/EBITDA multiple of 14.0x. The base for multiple estimation includes such companies as Alphabet, pre-2022 Baidu (BIDU), Meta Platforms (META), etc.

Based on our calculations, the fair valuation of Opera shares is $15.2/share discounted at 13%. Rating BUY.

Conclusion

Despite the presence of serious competitors such as Microsoft and Alphabet, Opera managed to find its target audience and an unoccupied niche in the market. The Opera GX product meets the demands of modern gamers much better than its analogs, which allows the company to increase its user base and ARPU at a high rate. In addition, the company shows a stable level of profitability without diluting the shareholder capital.

To manage your positions, we recommend to follow Opera earnings releases.

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