Opera Ltd: Analysis of Q4 '21 Earnings

This is a quick recap of Opera’s Q4 ’21 results for those of you who are already familiar with Opera’s story, otherwise my previous post may be a good start.

Opera announced Q4 ’21/FY ’21 results on Feb 17th. Quick highlights

• 45% QoQ increase in Q4 ’21 revenue to $72.6M

• AEBITDA increased 15% QoQ to $16M

• 52% YoY increase in FY ’21 revenue to $251M

• 12% YoY increase in AEBITDA to $28M

Headline numbers look decent, discounting the fact that Opera’s always beats its conservative guidance. I was expecting $76-77M in revenue and I think Opera Management left several(read $3-$5M) million $ of revenue on the table, but I understand how Opera Management is thinking here and is not a big deal to me.

To me, the Opera story is still very alive and kicking. I do believe that market has not been valuing Opera correctly and when it does, it will result in a parabolic move into $30’s.

However, the “expected” shocker(keyword expected which I will explain later) was the full write-down of Nanobank’s India operation in the book. I may do a full post on “How myopic thinking maimed Nanobank’s golden goose in India ”, but here is a short version of it.

Opera had a microlending business operating in India, Kenya, Nigeria. In reality, Opera’s management was not involved much in this adventure, Yahui Zhou used Opera’s cash on balance sheet, and to some extent Opera’s brand/credibility in Africa, to fund this venture but the real work was done by another one of his companies called Mobimagic. In Aug 2020, Opera merged its India and Kenya operations with Mobimagic to form Nanobank in exchange for 42% stake with $60M of opera’s cash already invested in microlending operations. Mobimagic actually provided the license, technology and back office operations to Opera’s micro lending business so it made sense for this merger for strategic reasons(For those reading carefully, the Nigeria operation went back to Opay from where it was originally bought).

As part of this arrangement, Opera’s Indian subsidiary, P.C. Financials, transferred funds out of India to mobimagic, which is bone of contention between the Indian government and Nanobank as part of money laundering investigation. Nanobank India had weak leadership and this reflected poorly on how the Indian government saw its India operation as a front for a Chinese Entity especially around the time when geo-political tensions between India and China flared up on territorial disputes between these two asian powers.

As of Oct 2021, in light of this investigation and freezing of its India funds, Nanobank paused its India operations. This was public knowledge as of Oct ’21 and Opera also called this out in Q3 ’21 earnings release. Excerpt below.

On the other hand, a combination of pandemic-related pressures and regulatory uncertainties have created unfavorable operating conditions in India. In the third quarter of 2021, the company effectively halted Indian operations since its payments to foreign suppliers and inter company charges are subject to regulatory inspection by the Ministry of Finance of India. Management at Opera continues to monitor the situation. The third-quarter Nanobank revenue is thereby driven by the other active geographies.

With this context, now back to the “expected” Shocker comment earlier.

Those who closely follow Opera know that Opera has previously bought back $50M of ADS at an average price of $8.32. This was when Opera had a $175M revenue run rate, its minority stakes were valued much less than 1/4th of what it is valued today. Even then, Opera was happy to buy back its ADS considering it as a much better use of cash.

Now, Opera has $290M revenue run rate, is on a path to 30% AEBITDA margins and its minority stakes in Opay and Starmaker are at least 4 times of what it was at the time of last buyback and even with Nanobank’s India operational frozen, it still is doing $63M in quarterly revenue which is about 2/3 of $92M revenue Nanobank had in Q4’19 when Opera announced its last $50M buyback.

Given this backdrop, One has to wonder why Opera stock did not spike up after the buyback announcement since Opera ADS has been trading at 20% below the average price($8.32) of last buyback. Sure the market is in doldrums, but I do not think that is the real reason. Hence as earnings approached and Opera ADS price did not respond to upcoming buybacks, I started looking out for curveballs which I was sure Opera Management would throw in Q4 ’21 earnings call and this one came as one of the top curveballs other than the google relationship which was also up for renewal. I think market makers, Craig Hallum and Cowen analyst who covers Opera, and big funds like Roumell already knew about the Nanobank situation, so it is not a surprise but still market makers used Nanobank write-off as pretext to take the stock price down.

In essence, market forces already knew that Nanobank write-off was coming and don’t be surprised if we see a downgrade or too on this pretext and this explains tepid reaction to buyback announcement and also to earnings.

Opera recognizes gain/loss on its minority stakes as net income, it is very hard to predict its net income as it depends on the whims of Opera Management. Sometime, they decide to re-rate the minority stakes and other times do not and hence it is very hard to predict what net income Opera would have in a given qtr and whether it will beat or miss. The Q4 ’21 headline number of negative net income would scare away a new investor which is not aware of vagaries of Opera Management in valuing its minority stakes which results in large fluctuations in net income.

Now back to Nanobank write off of India Operation. Opera Management is super conservative when valuing the minority stakes correctly but is very aggressive in marking the stake down. Opera has valued Nanobank 42% stake at $266M. Going by the 62% YoY increase and 25% sequential increase in Nanobank revenue in Q4 ’21, it is no secret that Nanobank’s Latin America operations are doing extremely well. Considering how fintech companies are commanding revenue multiple in the current land grab era in Latin America, Nanobank’s Mexico operation in itself would be valued at over $1B based on how similar startup like Clara are getting valued at.

One has to wonder, why Opera Management was so quick to mark down its Nanobank stakes by $82M writing off its India operation valuing Nanobank as a whole at ~$440M but ignored the rising valuation of its remaining business in Latin America, where its Mexican subsidiary in itself can be valued at over $1B using similar fintech valuation. I do not understand accounting rules that well, but won’t they need to re-value the entirety of Nanobank business and mark up the LatAm valuation while marking down the India valuation.

I think Nanobank Operation would be back in India with the funds unfrozen by summer. Nanobank squandered this large opportunity in India when it had large momentum due to some myopic thinking which I am sure they regret in hindsight, but they still have valuable data on $25M+ users, India market know-how and they will not give up on India completely for sure. Most likely, Nanobank will bring in strong local leadership to cast away the shadow of Chinese control and most likely would go Joint Venture with another business house of India. This is how business is done in India. Alibaba did the same when they invested in Paytm with a strong local leadership. We will see how quick Opera is in marking up the Nanobank India stake once it resumes operation since they have now marked it down to $0.

FY’22 Guidance

As expected, Opera provided conservative guidance of $300-310M in revenue(22% YoY growth) and $50-60M in AEBITDA(100% YoY growth, 18% margin). As the year progresses, Opera would revise up and end up between $340-350M revenue. My bullish forecast is around $360-370M in revenue but everything has to go right for that which mostly won’t.

With the results and guidance, the Market should no longer treat Opera as a “Show Me” story. It has a very healthy business model with 90%+ gross margins. If you look at the FY’20, Opera had Marketing and Distribution expenses of around $60M which ramped up to $120M in FY’21. Given that Opera’s core business generates such a good FCF, Opera has been indulging itself in several green fields bets like loomi and Crypto browser which is resulting in elevated Marketing/Distribution expense. I think Opera can easily dial those down to less than $90M without any significant impact to revenue. Most likely that won’t happen in FY’22 but I hope that Opera learns quickly and abandons these efforts in FY’23 if they fail to reach scale similar to what happened with Olist and Dify Wallet/BNPL which have been shuttered, rightfully so.

Where does this all lead?

I was hoping that FY’22 will turn the tide and with FY’21 results, Opera thesis will become clear to investor community which has been in “show me” mode for last year or so, and with FY’21 results in rear and FY’22 guidance and tailwind from upcoming buyback, Opera would start trading towards its fair valuation. Not so fast.

Opera investment is a tale of patience and regardless of all the tricks/curve balls Opera Management or market makers or analysts or other market forces present, there is no denial that Opera is trading at much below fire sale price. Yahui Zhou knows that and proved that by buying 1.1M ADS at ~$8.70 average price and I am sure Opera Management as well and most likely they have been buying stock for themself as well.

So, Is Opera stock left for dead by the investor community ?

Not really. Opera has been in stealth accumulation mode for the last 3 quarters. If you look at most recent 13F’s, you will notice the ADS held by institutions dropped from 9.6M to 7.5M. But if you dig a little deeper, you can see the accumulation from firms which have buy side coverage on Opera. Case in point Roumell. Value investor Jim Roumell has started talking publicly about Opera in forums focussing on value stocks and made Opera one of his top picks for FY’22. This again brings home my point that, as smaller value oriented funds or funds with their own buy side analyst start covering Opera, they see tremendous value in Opera. Now we all knows the drawdown GIM had in Q4 due to its exposure to EM/Chinese stocks, they were forced to liquidate over 50% of their Opera holdings in Q4 and we know that Yahui Zhou scooped up 1.1M out of those 2.9M ADS as liquidated by GIM. Other top holders, notably Greenhouse, Roumell and J Goldman have been steadily adding to their position for the past 3 quarters and added 870K ADS. That leaves around 900K ADS which were not bought by large funds which have 13F reporting requirements. I think that 900K ADS were bought by smaller funds with less than $100M in AUM, family offices, private value investors and most likely Opera senior management believing in Opera Story, most likely meaning that they would not get flipped around unless the price appreciates.

If you exclude GIM (marked in red) and other top accumulating funds(marked in green), assuming GIM is done selling, that leaves about 650K ADS(marked in grey) held by funds which are new and most likely flip QoQ if there is no price movement.

With Opera’s intent of ADS buyback( Jury is still out there though on how earnest they are and we will see that when they report Q1’22 numbers) and limited float, any positive news and coverage initiation by a reputed sell side firm would be the catalyst to propel the stock into $30’s. Hopefully soon, In this year of Tiger !

Disclosures : 

• I do not hold a position with the issuer such as employment, directorship, or consultancy.

• I and/or others I advise hold a material investment in the issuer's securities.

• This is NOT an investment advice/recommendations. Do your own Due Diligence if you decide to trade OPRA.