Opera Ltd : Latest Analysis of Massively Undervalued Stock

Introduction

Opera Ltd, which is popular in Europe and Africa for its namesake PC and mobile browser with 350M+ monthly active users, 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 $250M(50% YoY growth) in 2021 at 18% 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 2022

• Market Cap: ~800M

  • Cash, cash equivalent & marketable securities : ~$200M

  • Book value of starmaker(35% discount/DLOM) : $55M

  • Book value of Nanobank : $266M

  • Book value of Opay(15% discount/DLOM) : $49M

• Opera Core= $800M - $200M - $370M = $230M

  • Opera GM = 95%

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

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

    • Opera's FY '21 Investments - All adjusted EBITDA growth in FY '21 is invested back in business to expand in Europe and N. America

• Opera FY '21 Forecast - $250M revenue, $26M AEBITDA

  • Core Trading at ~0.92 x FY '21 Est. Revenue and 9x AEBITDA

  • ~18% CAGR since 2017

Let’s take a moment to have these numbers sink in. Opera Core, which has had 18% CAGR in the last 5 years and operates at 95% gross margin and expected to have 25-35% growth in FY ‘22, is trading at 0.9 times its FY ’21 revenue. If you take the very conservative 25% growth forecast to $312M for FY '22 revenue and 20% AEBITDA, Opera Core is trading at 0.7 times FY ’22 revenue and 5 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 2022, Opera is no longer just a browser company. In fact, its core browser business only contributes about half of its revenue through search. The other half of revenue is contributed by advertising, mostly via its 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 350 million MAUs and then get them to use other services like News, Fintech and Gaming. 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 ~12M MAU in less than 2.5 years. Each million users of its gaming browser bring $2.7M in additional revenue, so Opera has created a new business vertical, called Opera Gaming, which grew from $0 to $32M in revenue in just over 2 years.

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

  • OPay, a leading mobile wallet and mobile money operator in Nigeria where it now has 6.5% 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, is still recovering from covid impact in its biggest market - India and had Q1'21 revenue of $50M at 14% margin. Opera merged its fintech business in India and Kenya with Mobi Magic to form Nanobank with 42% stake.

• 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.

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 80 million MAUs in 2020, a CAGR of 17%. Opera Mobile browser and its data saving browser Opera Mini, have grown from 164 million to 190 million MAUs, a CAGR of 4%. 

• 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 ~12M million MAUs in just over 2 years.

• 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 #1 or #2 news apps in Germany, France and UK and in the top 5 in the 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 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 is tracking to $80 million in FY'21 revenue, 50% growth in daily revenue run rate year to date.

• Dify : Opera acquired 2 small companies in 2020 - Pocosys and Fjord bank and used Pocosys to build a new fintech product called Dify which was launched in Spain in Feb'21. Initially Dify will provide an integrated mobile wallet, Debit Card and Cashback for its users with plans to launch additional services like BNPL/Credit to its 50M active users in Europe.More recently, Opera seems to have pivoted from offering its own BNPL solution and instead decided to partner with Butter(for UK market) and Affirm(not announced yet)

• Opera Gaming : Early 2021, Opera acquired leading 2D gaming engine company, YoYo Games and launched a Gaming division combining it with its gaming focused browser Opera GX, which has grown quite rapidly to 12M active users since its launch in June 2019. Opera plans to build a gaming community around these 12M users and its thousands of GameMaker developers and has recently launched a publishing platform, GXC, for the 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 Crypto Browser : Opera is the first browser to integrate Crypto Wallet and build native web3 support for various blockchains and protocols. Opera is working on a specialized Crypto browser to provide the same differentiated capabilities to Crypto/Web3 enthusiasts similar to what it has done with Opera GX.

Business Model

• Search revenue : Opera makes search revenue from its 80 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, growing at 160% YoY

• Other revenue : This low margin revenue comes from providing professional services to Opay. This is being phased out completely by FY'21 as Opay has scaled its operation with its own staff.

Financials

• Opera Search and Advertising revenue has increased at ~20% CAGR, from $33.1M in Q1 '18 to $66M in Q3 '21. This revenue comes at 95% 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 '21 revenue of $250M, 52% growth over FY '20. It has forecasted FY '21 AEBITDA of $26M, despite its stated objective of investing all of the margin growth from FY ’20 into growing its gaming, news and fintech verticals. 

• With momentum in its advertising business due to 10+% browser growth in EU and ramp up of Opera News App in US and Europe, Opera has projected to grow its search and advertising revenue at 25% 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 is now expected to be around $250-255M.  Assuming moderate success from its Gaming and Dify/Crypto verticals, initiatives where Opera is investing over $100M, Opera will grow 20-30% YoY for the next several years and reach $420M-$430M revenue in FY'23 at 30%+ operating 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 6.5% of stake to participate in future growth of Opay.

• Starmaker : Starmaker app, which has an installed base of over 100 million users, is a social network for music lovers and Karaoke artists and is top 5 grossing music app in play store in South East Asia, Middle East, South Asia and Europe.  When Opera invested $30M for a19.35% stake in Nov'18, it had a $17M run rate.  Since then it has been growing like a wildfire -- a CAGR of 157% in 2.5 years --  with YoY growth accelerating recently to 250% to  $180M Q1 '21 run rate and with sequential acceleration of 38% from $130M Q4'20 run rate.

• Nanobank : Nanobank offers Micro lending and other financial services to underbanked populations in India, Indonesia, Kenya and Mexico via its mobile apps. In 2020, Opera merged its micro lending operations in India and Kenya with Mobi Magic to form Nanobank for a 42% stake. Nanobank collectively has over 50 million users of its mobile app and has recently expanded into Mexico with credit card features for its under banked population. Nanobank was growing revenue at a CAGR of 295% pre covid - scaling from $22M Q1 '19 revenue at 24% operating margin to $92M Q4'19 revenue at 41% operating margin. It has not yet completely recovered from covid in its largest market India and had $51M Q3 '21 revenue at 14% operating margin. Most recently, due to geo-political dynamics and regulatory audits, it paused its operations in India.

Opera SUM-OF-PART valuation

This sum of part analysis is done using a super conservative valuation just to highlight the massive disconnect in market valuation of Opera’s stock price. Opera and all its minority stakes are in hyper growth mode, and if one were to apply growth multiples for businesses growing at 50%-250%, it can almost double this conservative sum-of-part valuation.

• Opera is growing 52% YoY to $250 revenue in FY'21. With revenue growth expected to continue at ~25-35% pace in FY '22 due to the ramp up of the Gaming, Dify Cashback and Opera Ads initiative in Europe and US. Applying 6x P/S to FY22 revenue, Opera Core is worth $1.95B.

• Starmaker is growing at 160% YoY to projected $226M revenue in 2021. Applying 8x P/S multiple to FY21 revenue, Opera's 19.35% stake is worth $350M.

• Opay raised $400M at ~$2B on June 21. Subsequently, Opera monetized 29% of its stake for $50M reducing its stake to ~6.5%. This 6.5% stake is now worth $130M.

• Nanobank has a 2020 revenue of $217M at 18% Margin. 2021 revenue is projected to be ~$190-200M at ~10% margin. Applying conservative 3x P/S multiple to FY '21 revenue, Opera's 42% stake is worth ~$252M.

• Opera has cash equivalent of ~$200M 

• Adding all, Opera's conservative Sum of Part valuation is $2.9B – $25 per ADS – 255% increase from its price of $7.06 on Dec 31st, 2021.

Catalyst

• Affirm BNPL integration in Opera browser. Opera has not announced this yet but the release notes of the latest Opera release contain references to this upcoming integration.

• Upcoming launch of Opera’s specialized Crypto browser for native web3/blockchain support and intersection with its gaming division for metaverse play.

• Opera has barely scratched the surface on monetizing its browser users. The intersection of cashback and BNPL in its browser along with the gains in Opera Ad network will allow Opera to potentially double the ARPU in 2022. 

• Scale out of its Dify Cashback/BNPL initiative to Germany, France and UK in H1 2022. Paypal bought Honey for $4B for its 14 million users generating $100M in annual revenue in 2018. If Opera can convert 10-15% of its 50 million PC browser users in Europe to its Dify/Cashback product, It can contribute ~$50M of incremental revenue in FY '22.

• Continued growth in its minority stakes - Nanobank, Starmaker and OPay will provide additional upside to already low valuation.

• A funding event/IPO of Nanobank, Starmaker and/or Opay can further unlock value of its minority stakes.

• Continued momentum in Opera GX, along with monetization of GXC games,  will have a viral effect on acquiring new users. I expect Opera to double its Opera GX MAUs from 12 million to 20 million by 2022 end, bringing in additional $20M of FY'22 revenue.

• 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. 

• 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 investment advice/recommendations. Do your own Due Diligence.