2023-04-12 13:15:50 ET
Summary
- Opera is plowing ahead at a rapid clip, with strong revenues.
- The only downside to this story is that Opera's market share is a tiny sliver of the overall browser market.
- However, with no debt, and very strong free cash flows, paying 16x this year's free cash flows looks mightily attractive.
Investment Thesis
Opera ( OPRA ) is an independent browser company. The company may be relatively unknown compared to the ubiquitous Chrome ( GOOGL )( GOOG ), but what it lacks in market share it more than makes up for this with its strong free cash flows.
According to my estimates, Opera is priced at 16x this year's free cash flow. At this valuation, the risk-reward seems incredibly enticing.
Why Opera? Why Now?
Opera is a Norwegian-based company. But don't let the fact that it's non-US domiciled put you off. Indeed, as you'll see, this browser company is decidedly punching way above its weight.
Opera is a browser company. Its main distinguishing feature is that it offers a more personalized experience with integrated services. For instance, Opera's newest browser, Web3 Browser, deploys AI-powered technologies to provide a personalized browsing experience for crypto enthusiasts.
To emphasize this personalized strategy, here's an excerpt from Opera's Q4 earnings call ,
The company is also working on augmenting the browsing experience with new features that will interact with these new generative-AI-powered capabilities.
Among the first features to be tested is the new, small but super useful Shorten button in the address bar that will be able to use AI to generate short summaries of any webpage or article.
Again, Opera's key focus is on delivering a personalized route to access the internet. Other company products include Opera Gaming, which is tailored for gamers, while Apex News is aimed at news junkies.
During Q4 2022, the company has sought to churn out lower-value users and maximize engagement with its higher-value users.
Opera's annualized ARPU results have been consistently rising over the previous four quarters as a result of this initiative. Although Opera's 320 million Monthly Active Users are down 6.7% y/y, thanks to its strong APRU units, which we'll examine in a moment, this has resulted in consistent and increasing revenues.
Revenue Growth Rates Guided to Impress
Opera just finished Q4 2022 with 33% y/y revenue growth rates. Clearly, after exiting Q4 2022 with such strong growth rates, investors will be seeking at least a mid-20s% CAGR to support the moment in its share price.
That being said, its guidance ''only'' points to 18% CAGR. That being said, Opera's guidance is very carefully worded to say ''keeping with our tradition to set cautious expectations [...]'', meaning that Opera is attempting to lowball estimates to leave room to positively delight investors with its Q1 2023 results.
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Indeed, this tradition of tempering investors' expectations and then delivering strong revenue beats has been a process that has been welcomed by investors, with the stock nearly jumping 100% in the past twelve months.
But the bull case doesn't end here.
Free Cash Flows Set to Impress in 2023
Opera guides for about $80 million of EBITDA in 2023. This is an increase of 18% relative to the prior year.
Given that Opera only has minimal capex requirements, we can presume that Opera's free cash flow in 2023 will be around $75 million or slightly higher.
This leaves Opera priced at 16x this year's free cash flow.
Investment Risks
The obvious investment risk to Opera is that this is fledging browser, with only a tiny sliver of market share. Small movements in its market share could have pronounced impacts on its free cash flow potential.
For now, its higher-value users are still growing, but with its lower-value users churning out, the business requires substantial loyalty amongst developed market users.
Also, the share price has rallied significantly in the past few months. That means there are many shareholders looking to cash in, should the company's prospects for any reason to slow down.
The Bottom Line
Opera is a cheaply valued, at 16x this year's free cash flow, high-margin business, that's growing at a steady rate. There's a lot to like.
The one downside here is the most obvious aspect, that Opera's market share is tiny, with most PC users more than content with their default browser. Nevertheless, this hasn't stopped Opera from being used by 324 million users globally.
For further details see:
Opera: This Browser Company Is Sizzling