OPRA - Opera: The Fantasy Ride Was Shattered Recently - Why I'm Still Not Convinced

2023-09-25 08:30:00 ET

Summary

• Opera late buyers suffered a significant decline between July and August, falling nearly 60% toward its late August lows, likely stunning the weak holders.
• However, the hammering is justified and healthy for the market, allowing for a more constructive consolidation phase. I assessed that dip-buyers attempted to bottom out recently.
• Opera has several growth optionality levers to pull, lifting its ARPU and gaming-focused browser, which monetizes remarkably well.
• While OPRA isn't aggressively valued, the selloff is a stark reminder that assessing investor psychology is critical to defining a competitive edge.
• With my sell thesis having played out accordingly, OPRA's risk/reward is more well-balanced now. I explain why I still need more time to ascertain the robustness of OPRA's buying sentiments.

I last updated Opera Limited ( OPRA ) investors in July, urging them to consider taking profits after a significant surge from its 2022 lows. I cautioned late buyers to avoid chasing upward momentum swings, particularly in OPRA's case. Accordingly, I stressed that "while upward momentum seems 'hard to die,' when it turns, the fall could be painful as it swings against you."

That moment of reckoning arrived shortly after, as OPRA topped out at the $28.6 level in mid-July before falling nearly 60% through its late August lows. As such, my Sell thesis surpassed my expectations, as early dip buyers likely fled to protect their gains from dissipating. However, late buyers who ignored OPRA's warning signs in its price action in early July are likely licking their wounds, reeling from the hammering.

Notwithstanding the sudden rotation that likely stunned these investors, the steep decline is justified and healthy. The market needs to shake out excess optimism quickly before a more constructive consolidation phase supporting dip-buying accumulation could form again.

To be clear, OPRA isn't priced aggressively against its application software peers. Seeking Alpha Quant assigned OPRA a "B-" valuation grade, indicating relatively undervaluation. Furthermore, it boasts a best-in-class "A+" growth grade, with solid "B+" profitability underpinning its business model.

Opera's business model is predicated on search and advertising revenue attributed to its browsers. It recently upgraded its browser to be equipped with generative AI in partnership with OpenAI ( MSFT ). In addition, its search revenue (42% of total revenue) is mainly in collaboration with Google ( GOOGL ) ( GOOG ), while Opera's advertising partners drove the remaining 57% of its revenue base.

The company has also increased its monetization focus on Western markets to lift its ARPU, further boosting its growth profile. Opera posted an MAU of 320M recently, even though underlying growth has slowed, given its increasing focus on monetizing the higher-value markets.

Most of its users (85%) are in emerging markets. However, western market users accounted for "about half of the total revenue." As such, I believe it seems credible that the company has significant potential for growth, further boosted by the gains made in its gaming-focused browser, which monetizes very well.

Management stressed that its gaming users attract "excellent retention and engagement metrics, with nearly 3x the ARPU of the group as a whole on average." As such, I believe it's a key growth area to which investors must pay close attention, given its growth optionality.

OPRA has lost its short-term uptrend bias, as seen above. Buyers attempted to regain control of its upward momentum after bottoming out in late August, but sellers returned with conviction over the past month.

As such, I urge investors to consider giving OPRA more time to prove itself, as the rejection at the $15.8 level is pivotal. OPRA has inched closer to a re-test of its August lows ($12 level). If that level is held firmly, it's possible that I would consider revising my thesis, suggesting buying sentiments are robust.

However, if that level fails to hold, it suggests the market is keen on further digestion of its remarkable gains, leading to another decline toward the $9.4 zone, as indicated in the chart.

With that in mind, investors are urged to remain patient as OPRA's price action isn't constructive, and its momentum has weakened considerably. Late buyers who got crushed in the sudden selloff are given a timely and hopefully helpful lesson about the perils of chasing momentum and getting caught napping.

Rating: Upgraded to Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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