Opera Ltd : Continues to be a Massively Undervalued Story

Note: This is the update since my last writeup on 01/02/2022.

Introduction

Opera Ltd, which is popular in Europe and Africa for its namesake PC and mobile browser and is gaining momentum in US and Brazil due to its Gamer’s focused Opera GX browser, has 320M+ monthly active users and offers a compelling value+growth proposition. 

Opera’s browser business, which had a run rate of $120M-$130M in 2016 and negative growth, was bought by the Chinese Consortium led by Yahui Zhou in 2016 for $600M. It was then listed in 2018 on Nasdaq as OPRA. 

Since 2017, the company has grown revenue(excluding discontinued operations) from $109M in 2017 to estimated $325M(29% YoY growth) in 2022 at 20% CAGR while investing in itself to grow additional verticals along with making minority investments in other businesses which benefited from Opera’s scale and reach in Africa and other emerging markets of Asia. 

Before I deep dive into Opera’s products, business model and minority stakes, here is a brief summary of how disconnected Opera’s valuation is from actual strength in business and sum of part model.

At the time of Sale in 2016

• Revenue run rate : $120-130M

• Growth : Negative

• Sale Price : $600M

• Minority stakes : None

Current Valuation in 2023*

• Market Cap: ~$615M

  • Cash, cash equivalent : ~$59*M

  • Pending receivables from StarX and Nanobank Stake Sale : $160M ( Accounting for $8.2M payment in Q4’22 from Nanobank receivables)

  • Book value of 6.4% Opay Stake: $128M( Based on $2B funding rounding in 2021)

  • * This assumes that Opera will generate $25M Cash from Operation in Q4’22 and also accounts for special dividend payment of $0.80/ADS to be made early Feb’23.

• Opera Core= $615M - $59M - $160M - $128M = $268M

  • Opera GM = 82%

  • Opera's AEBITDA Goal = 25%-30% of revenue

    • Proved from Q4'20 results that they can operate at 28% AEBITDA margin

    • Opera is still investing for growth and I expect this theme to continue in FY‘23.

• Opera FY '22 Forecast - $325M revenue, $63M AEBITDA

  • Core Trading at ~0.82x FY '22 Est. Revenue and 4.3x Est. AEBITDA

  • ~Revenue CAGR(since 2017) accelerating from ~18% in 2021 to ~20% in 2022.

Let’s take a moment to have these numbers sink in. Opera Core, which has ~20% revenue CAGR for last 6 years and operates at 80+% gross margin is trading at ~0.8 times its FY ’22 revenue and ~4x AEBITDA. I expect Opera to beat Q4 revenue and to report ~$330M FY’22 revenue and $68M AEBITDA. If one take my 17% FY’23 growth forecast of $386M revenue and 22% AEBITDA margin, Opera is trading at ~0.7 times FY’23 revenue and ~3 times AEBITDA.

Company Background

• Opera Ltd, the Opera browser company, was established in Norway in 1996  and is one of the few survivors from the Internet Explorer era of early 2000 . Its browser business was bought by a consortium led by Yahui Zhou in 2016 for $600M. Its ADR was listed in 2018 as OPRA on Nasdaq.

• Fast Forward 2023, Opera is no longer just a browser company. In fact, its core browser business only contributes less than half of its revenue through search. The remaining revenue is contributed by advertising, mostly via speed dials in its Opera/Opera GX browser and Opera news app which is now a top 5 news app on both android and iOS in all of Africa, Germany, France, UK and US. 

• What Opera has done successfully is to take its browser user base of 300+ million MAUs and then get them to use other services like News, Sports,Gaming and Crypto. They call it Browser+ strategy, which has very low user acquisition cost.

• It launched a specialized browser for gaming enthusiasts, called Opera GX, which quickly grew in popularity from 0 to ~20M MAU in 3.5 years. Each million users of its gaming browser bring $3M revenue/yr (acceleration from $2.7 ARPU), so Opera has created a new business vertical, called Opera Gaming, which has grown from $0 to $60M in revenue in just over 3 years.

• It also used its browser user base to spin off 2 businesses:

  • OPay, a leading mobile wallet and mobile money operator in Nigeria where it now has 6.4% stake(after monetizing 29% of stake in June 2021). Opay recently had a funding round at a post money valuation of $2B. 

  • Nanobank, a provider of micro credit to unbanked population via its mobile apps and was doing $117M quarterly revenue at 30% margin pre-covid. Opera merged its fintech business in India and Kenya with Mobi Magic to form Nanobank with 42% stake. Opera divested this stake in 2022 for $127M after Nanobank hit setbacks in its largest market —India — in late FY’21.

• It also opportunistically invested $30M for 19.35% stake in starmaker -- a social network for music lovers and Karaoke artists – which is growing like a wildfire – has 250% YoY growth to $180M run rate in Q1'21 with sequential acceleration of 38% from $130M revenue run rate in Q4'20. Unfortunately, Opera sold this stake for $84M in early 2022.

• Opera bought back 23.4M ADS (20.6% stake) at $5.5/ADS from its Pre-IPO shareholder 360 Securities, for a total $128.6M in Nov’22.

• It also announced a special dividend of 0.80/ADS ( 13% of its $6.22 SP at the time of announcement) to be payable in Early Feb’23.

• Since going public in 2018, Opera has also bought back 10.8M ADS in open market so far from its 3 stock buybacks and thus in total, brought down overall share count by 25% from about 120M ADS in 2018 to 89M ADS now.

Opera Products

• Opera browser : Amongst the giants, Apple Safari and Google Chrome, Opera has built a niche and cult following of users who like Opera browser for many of its differentiated features - Integrated Messaging apps, Integrated music players, built in VPN, ad blocker and many more. Opera browser for desktop is available on  MacOS, Windows and Linux and has seen install base growing from 42 million MAUs in 2016 to 74 million MAUs in 2022, a CAGR of 10%. Opera Mobile browser and its data saving browser Opera Mini, have grown from 164 million to 247 million MAUs, a CAGR of 7%. Most recently, Opera Mini was the top downloaded app amongst all categories in Nigeria and Ghana.

• Opera GX : Opera GX, the gaming browser which Opera launched for Gamers with differentiated features like CPU and RAM limiter, Gaming aesthetics, discord integration and Gaming corner which surfaces deals and news related to Games. Since its launch in June 2019, It has grown to 20 million MAUs in just 3.5 years with 50% YoY growth most recently. It also monetizes at higher level($3 ARPU) than its flagship Opera browser validating Opera’s strategy of vertically focused browser.

• Opera News App : Opera News is AI based News aggregator which personalizes the news based on their browsing history. It is #1 news app in all of the major African economies  - Nigeria, South Africa, Egypt, Kenya and  Ghana. Since its launch in Germany, France, UK and US in Q4'20, It has become top 5 news apps in Germany, France , UK and US. It has grown at 42% CAGR -- from 72 million MAUs in Q4'17 to 211 million MAU in Q4'20 and is growing revenue at 160% YoY as of Q4'20. Opera stopped disclosing metrics around Opera news since early 2021.

• Opera Ad Network : Opera is one of the top 10 publishers of media impression given its scale in browser and its news app. Instead of relying on 3rd party ad networks, Opera has launched its own ad network, primarily to serve its own ad inventory and since its launch 2 years ago, it has grown at 130% YoY. It was tracking to $80 million in FY'21 revenue and Opera has not disclosed this metric since FY’21.

• Opera Gaming : Early 2021, Opera acquired leading 2D gaming engine company, YoYo Games/Gamemaker and launched a Gaming division combining it with its gaming focused browser Opera GX. Opera plans to build a gaming community around these 20M GX users and its 500K GameMaker developers and has recently launched a publishing platform, GX.games for the indie/casual game creator. Opera thinks that what tiktok has done for hobby video creators, GXC would do the same for gaming enthusiasts by allowing them to easily build and publish gaming with little to no coding experience. Opera is investing into building tools to monetize games on GX.games platform.

• Opera Crypto Browser : Opera is the first browser to integrate Crypto Wallet and build native web3 support for various blockchains and protocols. Opera has launched specialized Crypto browser to provide the same differentiated capabilities to Crypto/Web3 enthusiasts similar to what it has done with Opera GX and it has reached over million downloads in app store. Along with Crypto browser, Opera has also recently launched NFT analytics tool, DegenKnows to increase the stickiness of its crypto browser and announced the plan for seamless NFT minting and publishing using exclusive alteon.io integration in its crypto browser.

Business Model

• Search revenue : Opera makes search revenue from its 74 million desktop MAUs when they conduct searches from its search bar.  Opera has revenue sharing contracts with Google and Yandex.

• Advertising revenue :  Opera makes advertising revenue 2 ways:

  • Revenue shares from book marked link, speed dials and other forms of affiliate advertising on its browser. 

  • Native advertising in its Opera News App.

• 3rd Party Ad inventory Sale : Opera sells 3rd party ad inventory through Opera Ad network which it accounts under Advertising revenue but comes at low margin. As 3rd party ad sales ramped up in last year or so, it has contributed to overall gross margin dropping from 90+% to around 80%. About 14% of total Search/Advertising revenue comes from 3rd party ad sale which carries about 10% gross margin.

Financials

• Opera Search and Advertising revenue has increased at ~21% CAGR, from $33.1M in Q1 '18 to $85M in Q3 '22. This revenue comes at 80+% gross margin and has operating margin in excess of 30%. Opera has been investing for growth so its overall operating margins have fluctuated from 0% to 41% since its IPO. 

• Opera has forecasted FY '22 revenue of $325M, 29% growth over FY '21. It has forecasted FY '22 AEBITDA of $63M — 125% growth over FY’21 — despite continuing its elevated product and marketing investment to grow its gaming and crypto vertical.

• With momentum in its advertising business due to 10+% browser growth in NA and EU and ramp up of Opera News App in US and Europe, Opera has alluded to growing its search and advertising revenue at 20+% YoY for the next several years. 

• Opera has always taken a very conservative approach with its forecast. It forecasted $230M revenue for FY ’21 and ended with $251M revenue. Similarly it forecasted $305 revenue in FY’22 and its current forecast is $325M which it will most likely beat.  Assuming continuing success from its Gaming vertical and moderate success from launch of new verticals, Opera will grow 15-20% YoY for the next couple of years and reach ~$450M revenue in FY'24 at 25-30% AEBITDA margins. 

Opera's Minority Stake

• Opay : Opay, incubated by Opera,  is a leading mobile money wallet in Nigeria and has expanded to Egypt in early '21. In 2019, Opay raised $170M at a valuation of $500M in external funding from Softbank, Meituan and was doing $300M in transaction processing volume(TPV) per month. Since then it has grown to over 10 million MAUs. In 2020, Opay TPV/month grew 4.5 times – from $450M in Jan to $2B in December. Most recently in June '21, Opay raised $400M at ~$2B valuation. Opera also monetized 29% of its stake for $50M and has left around 6.4% of stake to participate in future growth of Opay. Opay is expanding into Egypt and Pakistan and seeing good traction.

Ownership

Opera has concentrated ownership with CEO and Board Chairman, Yahui Zhou, controlling 83% of all ADS. Paradoxically, this is the biggest risk and biggest catalyst for the stock growth. His silence gives ammunition to skeptics who have called him fraud considering his prior association with Qudian and Opera’s related party dealings. Skeptics have been speculating that he will take Opera private at absurdly low valuation thus robbing other minority shareholders. But he stands to benefits the most if Opera stock trades at fair valuation and offers him a potential opportunity to sell some part of his stake in future stock offering. I have requested Opera investor relation multiple time for him to comment and address shareholders either via prepared statement or on earning conference call but so far silence. Considering Opera is gaining a larger foothold in Europe and US, specially amongst savvy gamers, Opera needs to build a trusted and neutral identity and any take-private by Yahui would be viewed as Chinese control and any potential lawsuits or negative publicity would jeopardize this fast growing business in US and Europe by denting the trust.

I consider take-private by Yahui a low probability event considering the risks.

Opera valuation

This sum of part analysis is done using a conservative valuation just to highlight the massive disconnect in market valuation of Opera’s stock price. Opera and its minority stakes Opay are in growth mode, and if one were to apply growth multiples here, it can almost double this conservative sum-of-part valuation.

• Opera is growing 29% YoY to $325 revenue in FY'22. With conservative revenue growth expected to continue at 15-20% pace in FY '23 and beyond due to the strength in Gaming, Growth of Opera’s ecommerce initiatives( Shopping Corner/ Shopping workspace/Cashback/Deals) and continuation of 3rd party Ad ramp up. Similarly Opera is inching towards its stated goal of 25-30% of AEBITDA. Applying 27.5% AEBITDA to FY’24 expected revenue of $450M gets $124M. A 15x AEBITDA multiple gets $1.86 Billion.

• Opay raised $400M at ~$2B on June 21. Subsequently, Opera monetized 29% of its stake for $50M reducing its stake to ~6.4%. This 6.4% stake is now worth $128M.

• Opera will have cash/equivalent of ~$59M after paying $71M special dividend in early Feb’23.

• Receivables from Nanobank/StarX sale : $160M

• Adding all, Opera's conservative Sum of Part valuation is ~$2.2B , ~$25 per ADS — 260% over its $6.89 price on 14-Jan-23.

Catalyst

• Opera has barely scratched the surface on monetizing its browser users. Opera has been testing its cashback and overall ecommerce strategy over last 1 year and just launched its cashback offering in big 3 markets ( US, UK and Germany) in Q4’22. For comparison, Paypal bought Honey for $4B for its 14 million users generating $100M in annual revenue in 2018. If Opera can convert 10% of its 74 million PC browser users to its Cashback product, It can contribute ~$50M of incremental revenue in FY '23.

• A potential IPO/funding round of Opay can unlock further value from its 6.4% Opay stake.

• Continued momentum in Opera GX, along with monetization of GXC games,  will have a viral effect on acquiring new users. I expect Opera to again double its Opera GX MAUs from 20 million to 40 million by 2024 end, bringing in additional $60M by FY'24.

• As tiktok has democratized video content creation, Gamemaker can do the same for casual game developers —making it so easy and fun to make games suited for small communities, think like a small game created for a birthday party or school events. Opera is working on adding ad support/monetization through its Opera Ad network and even a transient viral hit can bring in millions of new users to GX.games and further monetization opportunities.

• A long shot but if Opera can enter into a partnership with Oprah to promote Opera browser in the US as “Oprah's browser”, it could bring in visibility and brand awareness in the US and can help Opera gain additional 10+ million users in the US and establish itself amongst the women shopping enthusiast helping it further its ecommerce/shopping ambition.

• Continued scrutiny and regulation of big tech in the US and Europe is positive for smaller players like Opera.

• Sell side Coverage and institutional visibility. Currently none of the major wall street firms cover Opera. New coverage from a reputed wall street firm can bring better visibility and new investors. With low float, this will be a major catalyst to the stock price. 

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. I am not a financial advisor. Do your own Due Diligence if you decide to trade/invest into OPRA.