2023-06-24 10:43:42 ET
Summary
- Opera investors who picked OPRA's October 2022 lows have been rewarded with an upside of nearly 460%.
- Investors are piling into the AI hype, as Opera released its new AI browser for general availability.
- Opera has demonstrated its ability to sustain profitability, while improving its opportunities for monetization, despite the immense competition.
- Management is working on capitalizing from increased engagement through its AI browser drive share gains.
- While OPRA's valuation remains well-balanced, its price action indicates caution is warranted. Investors shouldn't be tempted to jump onto the bandwagon now.
Opera Limited (OPRA) is a $1.56B market cap company that mainly competes against Google Chrome ( GOOGL ) ( GOOG ) and Apple Safari ( AAPL ) in the global browser market. However, its global market share is even lower than Microsoft Edge ( MSFT ), as the company operates in a highly competitive market.
According to Statcounter's latest update, Opera owns just 2.8% of the global browser market. Opera Bulls will likely contend that it has significant potential to gain even more share, while Opera Bears will highlight Chrome's immense competitive advantage over its users.
As seen above, Chrome's market share has stabilized since 2019 after a rapid share gain phase over the past ten years. Despite the advent of Bing chat integrated into the Edge browser, Google has maintained its dominance over the market, suggesting the immense stickiness of the platform. In other words, unless the smaller players such as Opera can provide highly compelling reasons for users to switch, Google will likely maintain its stranglehold over the market.
Notwithstanding, Opera has performed better in Africa, with a 7.6% share. Its 3.5% share in South America is also higher than its global average. Therefore, Opera's competitive edge seems to be more pronounced in the emerging markets while it attempts to monetize better in the developed markets.
It seems Opera's dual-pronged strategy is working, as it reported a robust Q1FY2023 earnings release, despite the weakness in global advertising markets. Keen investors should recall that Opera performed ahead of expectations at its April earnings scorecard, as advertising revenue increased by 26% YoY, accounting for 56% of total revenue. Search revenue increased by 18%, culminating in total corporate revenue growth of about 22% over the past year.
Moreover, the company is profitable. While Opera's adjusted EBITDA growth is expected to normalize after the recovery in 2022, the company reported positive adjusted ROE since 2018. In addition, analysts' estimates suggest that the company will likely continue improving its returns, with adjusted ROE expected to reach 8.5% in 2024.
Opera launched its " new native AI browser" for general availability this week, allowing all users to experience the power of OpenAI's ChatGPT and Opera's composer architecture. In addition, the company stressed that its composer architecture is "easily expandable, enabling integration with multiple AI models." As such, we likely haven't seen the full evolution of Opera's AI browser, as the company reminds us that it has plans to "integrate search services provided by Opera's key partners, offering a unified user experience."
Management also discussed at its recent earnings, articulating that the current focus is leveraging its AI browser to "capitalize on the increased engagement, anticipating additional monetization opportunities." As such, while Opera is a very small player relative to the browser behemoths based in Mountain View and Cupertino, it knows how to make the best use of its opportunities. It has maintained its ability to stay profitable and is expected to improve its ROE.
Notwithstanding, management spooked investors initially as it telegraphed cautious guidance of 18% YoY revenue growth for FY23, despite the solid performance in Q1. As such, investors should expect the momentum in the second half to normalize, even though the company stressed that its outlook is " cautious , given the volatile macro environment."
However, I gleaned that OPRA continued to surge higher this month before significant profit-taking moves were observed. I assessed that the AI hype has also lifted its momentum, with investors looking for more opportunities to partake.
Despite that, OPRA's valuation remains relatively well-balanced at the current levels, suggesting that it might not fall back toward its late 2022 lows as investors rotated out. Seeking Alpha Quant rates OPRA's valuation with a "C" grade, although it's much less attractive than the levels six months ago, as OPRA was rated with an "A" valuation grade back then.
However, I gleaned a possible bearish reversal in June (pending validation), suggesting that investors have used the breakout toward its all-time highs to take profit. I believe the move is justified after a remarkable surge from its October lows as OPRA recovered nearly 460% from its 2022 lows through its highs this month.
While the sell signal has not been validated, I believe it's time to be cautious, as the vertical rocketship-esque momentum spike is not likely to be sustainable without a steep pullback.
As such, this isn't the time to join the bandwagon, as you could be entering just as dip buyers who picked OPRA's peak pessimism last year cut exposure.
Rating: Hold.
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing, unless otherwise specified.
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Opera: Don't Be Tempted - Get Ready For The Correction