2023-05-16 07:57:35 ET
Summary
- Opera continues to sizzle. After reporting strong Q1 results, Opera raised its guidance for its top line and bottom line.
- Opera's business model oozes free cash flow and holds no debt.
- I estimate that Opera is priced around 15x forward free cash flow.
Investment Thesis
Opera's ( OPRA ) financial results at the end of April were stellar. But more importantly, its guidance for the year ahead looks compelling.
This web browser holds no debt. Also, substantial assets on its balance sheet are up for sale, worth around $220 million. And there's a small share repurchase program underway.
All in all, I believe that paying around 15x this year's free cash flows is mighty compelling. Particularly if the advertising market improves in H2 2023.
Rapid Recap
In my prior analysis, I wrote,
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.
The feedback that I got in the prior analysis was that Opera was actually owned by a Chinese company. So I now put this out there.
The way to think about Opera is a web browser with a focus on offering its users more personalization. For their part, Opera consistently charges that "the browser is not a commodity product".
2023 Prospects Discussed
Moving on, in my prior analysis, I highlighted the key concern to the investment thesis that Opera has simply a tiny sliver of market share compared with the other top browsers.
Furthermore, Opera is in the process of optimizing its marketing spend, as it seeks to be less active engaging users in lower monetizing markets. You can see this effort playing out in the graphic below, where the ARPU dipped slightly.
Nevertheless, in Q1 each user on average generated $1.08 of revenue on an annualized basis, an increase of 30% y/y versus Q1 2022.
Additionally, during the earnings call management remarked that the advertising market is performing stronger than expected.
Put another way, if the commentary from Alphabet ( GOOG )( GOOGL ) and The Trade Desk ( TTD ) is to hold any weight, there's the assumption that in H2 2023, the advertising market may continue to strengthen. Meaning that there's a high likelihood for Opera to continue to benefit from this underlying trend.
Meanwhile, Opera notes that it's deploying AI to improve the browsing experience. This is what Opera stated on the earnings call,
After announcing our collaboration with OpenAI, Opera became among the first browsers to have support for popular services such as the Chat GBT directly in our browser side bar, as well as innovative AI prompts.
In essence, Opera is out to improve the level of personalized news and increase user engagement.
Revenue Growth Rates Expected to Tick Around Close to 20% CAGR
As I discussed in my prior analysis as we headed into Q1 2023, Opera has recently made it a habit of tempering investors' expectations and then over-delivering.
Given that management guides for about 16% CAGR for 2023, I believe there's a possibility that in 2023, Opera's revenue growth rates may reach 18% to 20%.
Focusing on Free Cash Flow
Above we can see that Opera's free cash flow jumped significantly in Q1 2023. According to Opera's guidance, I believe that Opera's free cash flow in 2023 may reach $80 million, particularly assuming the advertising market was to strengthen in H2 2023.
Opera's balance sheet holds no debt and approximately $85 million of cash and equivalents. Plus, in addition to its cash balance, there are $220 million of assets held for sale, reflecting a 9.5% stake in OPay.
Finally, it's worth noting that Opera still has about $60 million of share repurchased authorized after it bought back $2.5 million worth of stock in Q1.
The Bottom Line
As alluded to already, the risk factor here pertains to potential regulatory risks that may stem from its users in Southeast Asia and Africa.
The other noteworthy risk factor is the competition from OS default browsers on devices. This risk aspect cannot be undermined.
However, I believe that with a clean balance sheet and whilst being highly free cash flow generative this business has what it takes to delight shareholders. Plus, it's irrespective of the share price chart, paying 15x forward free cash flow is not too expensive.
For further details see:
Opera: Why You Should Consider This Browser