2023-06-03 08:02:06 ET
Summary
- Opera Limited has developed a web browser with unique features, including a free VPN, crypto wallet integration, and generative AI, catering to the growing trend of blockchain technology and Web 3.0.
- The company has a strong balance sheet and has experienced revenue growth, primarily from emerging markets, with a focus on increasing average revenue per user in developed nations.
- Despite potential risks from competition and revenue growth challenges, Opera stock is considered a buy, with a price target of $27.84 based on the book value.
Web 3.0, which is essentially the institution of blockchain on the Internet, is one of the surest aspects of the future that I can see. The power of blockchain technology lies in the ability to cut out the middle man. Smart contracts enable "trustless" transactions without third parties. These can happen between consumers, between producers, and from producer to consumer. As a new form of application harnesses this technology, a market opportunity for a new web browser exists. Opera Limited (OPRA) has capitalized on this opportunity. Based on a robust product, excellent revenue growth, a strong balance sheet and demonstrated profitability, I rate this stock a buy .
Product
Opera Limited designed a web browser with features that other web browsers like Google Chrome do not inherently have. First and foremost, Opera comes with a free VPN for enhanced privacy and security. One key component of Web 3.0 is data security. Third parties between content producers and consumers like Facebook and Google are notorious for taking cookies, or bits of data on Internet activity, and later using them to market products and services. The advertisement space on the current Internet is a primary source of revenue earned from e-commerce businesses. Although Opera does generate revenue through targeted ads, by offering users a free VPN and Ad blocker, Opera empowers users to own their data when they need to.
The Opera Crypto Browser is configured to facilitate blockchain transactions. They have partnered with many leading crypto platforms to integrate them in one place. Different digital assets may exist on different blockchains, and with old browsers it can be tedious to toggle from wallet to wallet and platform to platform. By streamlining different cryptocurrency platforms into the Wallet Selector, and embedding its own Opera Wallet in this feature, Opera is solving the problem of scattered assets, saving end users time and energy as they use their digital valuables.
Another key feature of the Opera system is Generative AI in the Opera Browser, currently separate from Opera Crypto browser. When browsing, AI prompts users with options to summarize content, form social media posts, explain complex ideas, and most powerfully do creative work. Opera writes on their website,
"There's so much information out there, and now you can have it delivered with any specifications you need. Want a recipe based on what you have in the fridge? Voila! Change the servings, swap ingredients, make it vegan or spice it up. Want to take the best trip of your life, or maybe just stay in and watch a movie that suits your mood? Tell the AI what you like, and don't like, to get custom recommendations. You now have a reliable source for gift ideas, tailored exercise regimens, and well-composed DMs for your crush. Helpful brainstorming is just one click away."
By unlocking barriers to AI, such as not knowing how or when to use it, Opera is delivering value to end users that other browsers simply do not.
Other features include a browser tailored to the needs of gamers, with capability to create games as assets. With GameMaker, you can make games for Windows, Mac, Linux, Android, iOS, HTML5, Xbox, PlayStation, and Nintendo Switch. There is also news and messenger integration, and NFT minting available for gif, jpeg, png, tiff, webp, and svg files. An Opera app is available on mobile devices and smart TVs as well.
Revenue
Opera has successfully grown revenue from a few different of sources. The image below, from the latest Opera investor presentation , shows the revenue breakdown. The dark blue portion of "search" refers to the revenue that is generated from websites that pay for their page to come up first when a user searches in the browser. The lighter blue portion refers to revenue earned by selling traditional advertisements on webpages.
One key thing to note is that Opera's revenue comes primarily from emerging markets, although their strategic goal is to grow average revenue per user in developed nations. The image below presents some key risks to the investment. Although average revenue per user has grown relatively steadily to over $1 per year, the total number of users has been in a down trend since Q3 2020. This is driven primarily by contractions in emerging market users, while developed market users have been in a more stable growth trend. For many investors, the fact the majority of revenue comes from emerging markets may discount the revenue quality.
Taking into consideration both the ARPU and the decline in users, revenue growth still looks pretty good, although it is volatile. 2020-2021 was a bit of a rough patch, mostly driven by a dip in ARPU. Revenue has further decelerated into 2023, although it is still quite high at 21.61% growth. This is reflected by ARPU growth driven by developed market users. Quarter-over-quarter revenue growth has been steadily strong since 2021, despite a dip in the latest announcement.
Financials
Opera Limited has a very strong balance sheet. Total assets amount to $911.6 million, while liabilities total just $78.1 million. Most liabilities are accounts payable, which are $42.9 million. Opera has enough cash on hand, $84.8 million, to pay down all of its liabilities, long term and short term.
Cash flow is strong as well. Cash from operations has more than doubled since 2021. TTM net income more than doubled from December of 2022. Regarding cash from investing, marketable securities accumulated years ago have been sold off to raise cash. The company hasn't issued any common stock since December of 2019 and has actually spent almost $300 million in stock buy backs over the past few years. In December 2020, it reported paying back most of its debt, around $57 million, and has steadily paid back debt each year since. Opera hasn't needed to raise capital since it sold common stock in 2019.
The image below shows GAAP earnings per share reported since Q3 2020. Earnings per share declined from their peak in Q2 2021 through Q1 2021. They have since rebounded and grown three consecutive quarters, turning positive in Q3 2022. In the last three months, futures earnings have been revised upwards by Wall Street 3 times. The consensus estimates for December 2023, 2024, and 2025 are 0.72, 0.81, and 0.98 respectively.
Valuation
Opera Limited has a book value of $833.5 million. The current market cap is too low at $1.55 billion at the time of writing. This is less than double the book value, while the sector median in Information technology trades at more than three times the book value. The sector median implies that this stock should have a market capitalization of about $2.5 billion. Dividing by 89.8 million shares outstanding, I calculate a price target of $27.84. This assumes no further buybacks and no dilution. Given that Opera has developed proprietary and first-in-class assets, I argue that the book value is the correct multiple to use in valuing this company. Forward price to earnings and revenue would be good if there were reliable estimates. However, given the volatility in revenue growth, I do not believe that these are safe multiples to use.
Risks
There are several key risks to be aware of before opening a long position in Opera Limited. The first risk is that legacy browsers such as Google Chrome, Microsoft Edge, and Firefox develop functionality similar to the assets that Opera has developed. These players certainly have the resources to do so, and the rebranding of Meta suggests that big tech is no fool to the long term trend towards blockchain solutions. Another risk is that ARPU doesn't grow and investors are stuck with developing market users, as mentioned above. The revenue that these users provide often doesn't equate with developed markets revenue. Furthermore, there is a flaw in the security and privacy business proposition in that Opera does take cookies and conduct sell targeted advertising in some cases. While search revenue does not necessarily depend on data sharing, advertisement revenue does. There is thus the risk that Opera needs to forgo advertising revenue, or lose its edge in offering privacy. Lofty earnings growth expectations are another risk, as misses would likely hurt share prices.
Conclusions
I reiterate that Opera stock is a buy. Share prices are currently undervalued based on the book value, even after the recent rally. Momentum should continue, and on down days I recommend accumulating shares. The product is first in class and highly tailored to the long run trends of Internet use. There is a strong likelihood in my opinion that developed market growth continues and this company beats lofty earnings per share estimates. It must continue to grow search revenue and maintain its privacy edge. If it can do that while upselling users on advanced products and services, then this company is golden.
For further details see:
Opera Limited: It's Looking Good With The Advent Of Web 3.0