Not financial advice. Full disclaimer available here.
Evolution AB (EVO.ST) is a Sweden-based company active in the online casino market. The company develops, produces, markets and licenses fully-integrated B2B live casino solutions for gaming operators. The gaming operators then market and offer the products to their end users. The Company provides its services through live casino studios across Europe, Canada and the USA.
Ever since the allegations of irregularities in November of last year (unfounded in my view), I have been watching Evolution's share price hoping that it would retrace to a level where the risk/reward is attractive. Although we are still many points away from that, after writing about the unwind of the stay-at-home trade a few days ago, I think it's time to start paying attention to the leading B2B provider of live casino systems.
The opportunity
The US tends to lead the world in most trends. That is not the case for online gambling. According to H2 Gambling Capital, the online share of the total casino market is 50% in Europe versus only 6% for the US. Europe accounts for the majority of Evolution's revenue (53%), followed by Asia (27%), North America (11%) and the rest of the world (ROW = 9%). Therefore, the growth opportunity is mostly outside of Europe.
Over the next couple of years, Asia and North America are likely to overtake Europe as Evolution's primary revenue source. Here is what CEO Martin Carlesund had to say about those markets in his opening remarks earlier this week:
Asia and North America are growing very fast with year-on-year growth of 125% and 205%, respectively. We see good potential in both of these markets and expect a continued high growth rate going forward, particularly as we are still a small actor in Asia and with more and more states regulating our products in the US.
While US growth is inflated by the acquisitions of NetEnt and BTG, the assumption in bold above remains valid. Here is a conservative way to look at the valuation:
Europe + ROW = €668m in sales
56% => net profit margin
13.5% => annual growth rate for the online casino industry over the past 5 years
Total €5bn = 668 x 56% x 13.5
Multiply by 2 to include Asia & North America and we get a €10bn valuation for the group.
That's less than half of the current market cap or ~ SEK 450 per share at an exchange rate of 10:1 and 222m shares outstanding after dilution. However, Evolution's revenue mix is about 80% live and 20% RNG. This is important because live casino is the fastest growing segment with an annual growth rate of 28% versus 9% for random number generator games (i.e. slots).
As a result, Evolution's blended growth rate should be closer to 24.2% = 28 x 0.8 + 9 x 0.2 than 13.5%. In addition, management aims to grow faster than the overall industry and has successfully done so since inception (organic revenue growth was ~50% in 2021).
With this in mind, my base case is that Evolution offers good value somewhere around €14.6bn (605m of earnings times 24.2). This translates into a forward P/E of ~16 as per analyst estimates of €4 per share for 2022, according to data from Refinitiv.
So to get "growth at value multiples", I'd like to buy shares below SEK 650. At that price level, I think I am risking 200 to potentially make over 1,000 if the stock goes back to its all-time high. The chart below illustrates this asymmetry:
Why would Evolution eventually make new all-time highs? Because we are still in the early innings of online casino (the global market is less than $20bn) and I can't think of a better company than Evolution to play this trend. It is the right business model with the right management team and it is miles ahead of competition.
On top of that, Evolution is very capital efficient, has no debt, pays a dividend and you get the 2 co-founders (largest shareholders also) representing investors on the board of directors.
On another note, I can't write to you this weekend without mentioning the situation in Ukraine. I am by no means a geopolitical analyst but I have a few thoughts:
Russia does not need to invade Ukraine for equity markets to go much lower; uncertainty just has to escalate
If world war 3 is upon us, oil will go crazy but I don't know that it's bullish for Lukoil, at least in terms of share price
Gold is likely to have another leg down if it all turns out to be media hysteria, but I think adding here is not too risky
Watch semi-conductor stock TSM. If the threat is real and the US response is weak, China might make a move on Taiwan
That's a lot of ifs! Correct, because I have zero edge in trading this event. So I am not. Still, that's 4 trade ideas for those who want to try their luck.
Ashmore reported their interim results for the 6 months ending in Dec 2021 on Thursday. As expected, the numbers were bad. The only good news was that the local platforms grew AUM significantly, 12% in total. That said, "a lot of it is in the price" to quote CEO Mark Coombs, speaking to the 2022 outlook for emerging markets (EM). Here is a chart from the presentation showing EM's underperformance over the last 10 years:
Lastly, I have changed my mind on Pinterest. I still think it's a great company but I no longer feel comfortable with an entry price of $25. Since management gave guidance for the year, I started asking: what if profits actually decrease in 2022? What if analysts start to factor in stock-based compensation in their models? (I did not). What if social-media companies become dead money until they get to some stupidly low multiple because the market is so fearful about inflation?
If the tech rout continues and Pinterest vibrates around $25, then I’ll probably turn bullish again but best to stand aside for now.
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