OPRA - Opera Limited: Pullback Is A Great Opportunity

2023-10-10 12:04:51 ET

Summary

• Opera Limited's stock has had a great year, but has pulled back significantly in recent months.
• OPRA is showing good traction with its push to focus on Western users and its gaming browser.
• The company looks poised to continue to beat and raise for the rest of the year.

Back in June, I wrote that the momentum could continue for Opera Limited ( OPRA ) as the company shifted focus to higher-valued users and developed markets. At the time, I thought the company looked poised to continue to beat and raise guidance with user gains from pre-installations not contemplated in guidance. However, the stock has lost of third of its value since, while the S&P is near breakeven. Let’s catch up on the name.

Company Profile

As a refresher, OPRA offers a variety of PC and mobile web browsers, as well as gaming portals and development tools, an ad platform, news content recommendation products, and Web3 and e-commerce products and services. The company has several browsers, including Opera Mini, Opera for Android, Opera for iOS, GX Mobile, and its namesake PC browser Opera.

Search and advertising are the company’s main source of revenue, and it has revenue-sharing agreements with major search engines Google ( GOOGL ) and Russia’s Yandex when users use one of OPRA’s built-in search bars. OPRA also get revenue from delivering ads on its browsers and other properties and through technology licensing.

Shelf Offering and Q2 Results

OPRA stock took a big hit after my initial write-up, falling nearly -30% at one point, when the company filed a mixed shelf offering in July. The drop was a bit surprising as a shelf is generally just a precursor that shares, or other securities, could be sold at some point in time. Shelf registrations are pretty routine, and generally don’t see stocks have such a big reaction.

OPRA did eventually price a secondary offering to sell ADS shares owned by a pre-IPO holder. About 6.9 million ADS were sold at a price of $12.25 per ADS. Underwriters were also given the option to sell another 1 million shares for overallotments. OPRA did not receive any proceeds, and shareholder saw no dilution. The company has a pretty tight float, so it did open that up. Tight float companies are often difficult for funds to build positions in.

In between the shelf filing and secondary, OPRA reported solid Q2 results, although not good enough to the market’s liking. With the stock more than doubling this year, the company needed some pretty extraordinary results to get investors excited it appears.

For the quarter, OPRA grew revenue 21% to $94.1 million, topping the consensus of $91.7 million.

Advertising revenue jumped 25% to $53.8 million, driven by Opera Ads and monetization efforts for mobile and GX browsers. Search revenue climbed 15% to $38.9 million driven by its focus on more developed markets. Technology licensing and other revenue rose 45% to $1.45 million.

Number of monthly active users (MAU) fell sequentially by 3 million to 316 million, as the company continues to focus more on more-profitable users in North America and Western Europe. The Opera GX browser saw users rise 9% sequentially to 23.7 MAUs.

APU rose 25% year over year to $1.17 and was up 8% sequentially. Opera GX ARPU rose 7% year over year to $3.10.

Discussing ARPU on its Q2 earnings call , CRO Frode Jacobson said:

“We continue to build in the trend of ARPU growth. We see our momentum in western markets and our growth there is happening actually across PC, GX and mobile products. So that's an important driver for us. And in addition, we have GX, which is indeed a success story, but I think it's still under-indexing on advertising relative to our classic PC browsers. It's just newer in its development. So we do see headroom there.”

Adjusted EBITDA came in at $20.5 million, up 24%. It generated $13.5 million in operating cash flow in the quarter, and $13.2 million in free cash flow. Earnings per ADS was 15 cents, topping the consensus by 3 cents.

Turning to the balance sheet, the company has $98.2 million in cash and no debt.

Looking ahead, OPRA raised its full year revenue guidance to $380-$390 million, up from a prior outlook of $373-$390 million, representing 16% growth at the midpoint. It took its full-year adjusted EBITDA guidance to $80-84 million, from a prior forecast of $77-$83 million.

For Q3, OPRA is expecting revenue of between $97-$100 million, representing 15% growth at the midpoint. It is projecting adjusted EBITDA of between $18.5-$20.5 million.

As I projected in my initial write-up, OPRA did indeed beat estimates and raise guidance when it reported its results. However, high expectations after a big run for the stock and a more cautious market did lead to a pullback in the name despite the solid results.

That said, the company’s focus on Western users continues to power ARPU, and yet Western users still remain a small part of its total user base. At the same time, the company gaming browser continues to do well and gain traction.

Valuation

OPRA currently trades around 11.3x the 2023 consensus EBITDA of $81.5 million and 9.5x the FY25 consensus of $96.3 million.

It trades at a forward PE of 15x the 2023 consensus of 75 cents and 13.3x the 2024 consensus of 85 cents.

The company is projected to grow revenue nearly 17% in 2023 to $386.9 million, and over 14.5% to $443.3 million in 2024.

There are no great public comparables to OPRA, and its historical valuation isn’t much help either. However, for a company putting up the type of revenue and EBITDA growth that OPRA is, the stock looks pretty undervalued.

Conclusion

After being one of the hottest stocks of 2023, OPRA has certainly cooled off. However, that opens up a nice entry point for potential new investors. After being what I thought was close to fairly valued the last time I looked at the company, the stock now looks undervalued in my opinion given its growth and strong financials. Place a 15x multiple, the same as its revenue projected 2024 growth rate, on 2024 EBITDA, and you have an over $17 stock.

Meanwhile, OPRA is showing good traction with its push to focus on Western users and its gaming browser. In addition, pre-installations in the second half are still not contemplated within guidance, so there should be continued opportunity to see more beat and raises this year.

As such, I continue to view OPRA as a “Buy,” and like the stock much more after its pullback.

The biggest risks to the downside are a continued slump in the ad market impacting the company’s ad revenue, as the ad market has seen softness and there is no reason to think OPRA is completely immune from these pressures. Current institutional investors selling more stock in a secondary is also another potential risk, as the float is very tight on the name.

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