Opera Q3 2022 Analysis
Q3’22 Earnings Summary
$85.3M revenue, 28% YoY growth( slight deceleration from 29.4% in Q2)
Search revenue $35.4M , +15.3% YoY ( acceleration from 13% growth in Q2)
Advertising revenue $49.1M , +40.7% YoY ( deceleration from 49% growth in Q2)
82% GM ( down from 85% in Q2 due to increased 3rd party inventory )
AEBITDA $21.4, 25% margin (acceleration from 21% in Q2)
20% YoY reduction is Marketing and Distribution Expenses( 28% reduction in Q2)
Repurchased 900K ADS at $4.9 average price
Increased FY’22 rev guidance to $323-326M and AEBITDA to $62-64M ( from $313-319M revenue and $53-60M AEBITDA)
Opera closed the 23.4 ADS buyback from 360 at $5.5. It has been most perplexing bit for me. Why would a billionaire, Hongyi Zhou, agree to sell at the same price he bought Opera as part of consortium when Opera has less than $100M revenue with no growth, and was not profitable, and was bleeding users. What prompted him to agree to this sale at significantly below firesale price? Was he so cash strapped that he took whatever Opera management offered him?
I do not think he was cash strapped at all, so why?I have a hypothesis and I am pretty sure what transpired here but I want to keep it to me, at least for now. I like this buyback though as an Opera shareholder. Opera is able to reduce share count by 20.6% at price which is best use of Opera’s cash and would offer at least 400+% returns on this in a year’s time frame assuming continuation of Opera’s growth trajectory. Although I do hope that there are no nefarious intentions here from Yahui Zhou to take Opera private using this below firesale transaction as a basis. This has been discussed ad nauseam and may be the biggest overhang on stock price, but I think this will be penny wise and pound foolish for Yahui especially now that he owns 82% of Opera anyway.[update] A reader pointed out the struggle at 360 Security, with declining revenue, mounting losses and job cuts that may have been the reason for being so desperate for cash and thus selling OPRA stake at well below fire-sale valuation. Interestingly, 360 Security took 30M loss on its original $158M investment when they bought that stake in Opera in 2016.
Most significant bit from conference call is — In constant currency basis, the revenue increased by over 40%. In constant currency, the revenue would have been $94M. So I am not off when I projected first $100M quarter in Q4 early this year.
Overall a strong quarter beating top end of rev guidance by $2.3M and ABITDA by $4.4M. Just like strong Q2 earnings, the market reaction to earnings has been muted, some due to current market conditions but mostly due to the fact that it is not discovered yet by the investor community. In this market environment though, any slight beat and not to mention increased guidance, would have easily taken a stock up by 30-50% considering how undervalued Opera is, but Opera is not for impatient investors anyway. As an Opera shareholder I am perfectly fine with it as long as Opera continue to take advantage of it by buying shares aggressively. At some time, Opera stock price would rationalize and that would be a very quick move up and will take many by surprise.
What is Next
Opera mentioned again that they are looking into other customized browsers which is wonderful idea to cater niche segments. I have already requested this feature for Parents from Opera, hopefully this see the light of the day someday.
https://docs.google.com/document/d/1mYVvtNi5Bzc6K4v_MT0adtB314Uk8BG8Jd7IaQIIdDE/edit?usp=sharing
Opera finally retired the doomed Dify brand, renamed Dify Cashback as Opera Cashback and launched it in Germany, UK and US. After Gaming, Shopping seems to the next vertical Opera is focusing on. This has significant monetization opportunities but most of it we will see towards 2nd half of FY23.
It looks like Opera’s deal with Affirm and Butter for BNPL will not see light of the day as Payments is no longer Opera’s focus.
Opera Gaming and Opera GX seems to be getting lot of traction. If they can get one hit game on gx.games, Opera can see viral adoption of its GX browser and traffic to gx.games. Opera has so far not monetized GX.games and if Opera is seeing some traction, we should expect monetization next year.
Opera continues its investments in crypto space. I do not know much about crypto, so don’t know how successful they will be or if they are too late here. May be, if instead of Dify, they invested in Crypto back in 2019/20, they might have been able to gain foothold during the crypto boom. Hopefully they know what is the potential here and I hope this does not end with the same fate as Dify although I suspect Opera will get any significant traction here which will result in any meaningful revenue.
Opera has good shot at $100M revenue in Q4 . I think this will mark the turning point in stock.
We have to assume that Opera may not be able to collect most of the $116M remaining on the $131M Nanobank sale transaction, given that this friend and family deal make Opera assume all the downside risks but does not allow Opera to participate in the upside, if any.
Opay seems to be doing great in Pakistan and Egypt, so would be watching out for an IPO in FY’23 at around $3-4B valuation. Opera’s 6.4% stake, which is worth $128M could be worth $200+M by next year.
Opera has cash/marketable securities of $201M, remaining $52M receivable for StarX sale, remaining $116M receivable for nanobank sale, and $~128M of Opay stake. Opera will pay $128M to 360 in November bring down the cash/equivalent to $73M. Assuming no further payments from the remaining ~$116M Nanobank sale receivable, core Opera is trading for less than ~$150M.
Who is Selling ( and buying)
GIM continue to sell, and offloaded another 1.18M ADS in Q3. Opera bought 900k so we can assume it is — seller GIC, buyer Opera — theme here. GIM has another 720K ADS so we they continue to sell and how much Opera is able to buy back in Q4.
We will see when Nov 15 disclosure comes out, who else is selling/buying. My guess is not not many sellers left knowing how underpriced Opera is at the moment.
Opera bought 1.2M ADS in Q2, 900K in Q3 and another ~80K in Q4 so far. The average daily volume in Q1 was 135K, 111K in Q2, 74K in Q3 and 47K in Q4 so far. The trend shows that Opera will run out of opportunities to buy any significant amount if this trend in Q4 continues. At some point of time, some fund will realize that Opera is massively undervalued and will start building a position and I would not be surprised that we will see massive up move in Opera which I have been projecting for last 1+ year. At some point of time during next year, I am sure that this broken clock will be right.
At this time, I continue to expect Opera to meander around $5 until Q1 2023. Management is no hurry for the SP to appreciate, they even stopped going to investor conferences. Less investor visibility is good as long as they can continue to buy back stock at fire-sale valuation. Few analysts who cover Opera have been bringing down their stock price target(not that it has ever mattered even when they increased the target). I think it will stay hidden gem for couple more quarters.
Although looking unlikely based on volume, I would be happy if they end up buying another 2-3 million ADS at $5-7.5 price. The last 2 buybacks were at $9.5 and $7.5 average price; Opera addressable market , revenue and AEBITDA were all significantly lower back then.
So basically Core Opera continue to trade at below $0 to ~$150M depending on which math you are comfortable with. I think Once Opera can show its first $100M quarter, most likely Q4’22, market sentiment would turn around and who knows meme crowd may take note as well.
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.