Opera Q4 2022 Analysis
Q4’22 Earnings Summary
$96.3M revenue, 33% YoY growth( acceleration from 28% in Q3)
Search revenue $39.0M , +12% YoY ( deceleration from 15.3% growth in Q3)
Advertising revenue $56.7M , +52% YoY ( acceleration from 40.7% growth in Q3)
81% GM ( down from 82% in Q3 due to increased 3rd party inventory )
AEBITDA $22.8M, 23.7% margin (deceleration from 25% in Q3)
Marketing and distribution expense staying flat to $29.5M YoY while going down from 41% to 31% as a % of revenue YoY.
Repurchased 600K ADS ( down from 900K in Q3’22) ADS at $5.14 average price. Still $32.7M from $50M buyback authorization remain.
Beat the upper end of increased FY’22 rev guidance($323-326M) by $5M and upper end of increased AEBITDA guidance( $62-64M) by $4M. These guidances were upward revised from $313-319M revenue and $53-$60M AEBITDA after Q3 earnings.
Opera closed the 23.4M ADS buyback from 360 at $5.5. Together with the share buyback, this brought down the outstanding ADS from 114M to 89M.
Marketable securities of $35.3M at the end of Q3’22. Opera has outsized gains of $43.6M in Q4 after mounting losses all through the year. At the end of Q4’23, the value of Opera’s marketable securities was $66.2M with $13M in securities which were sold in Q4 but settled in Q1. Opera sold vast majority of these marketable securities to *someone* for $59M to fund the special dividend. No points for guessing who is that *someone* :). Basically 84%(~$60M) of this $71M special dividend went to Yahui/Kunlun which essentially paid for the swap of the Opera’s marketable securities portfolio with Yahui/Kunlun.
As a result of outsized gains in marketable securities, Net finance income for FY’22 was $21.5M. FYI - Opera allows Yahui to invest up to ~$70M( or is it $76M) of Opera’s cash in marketable securities in exchange for a fee’s. I think this fees paid to Yahui end up in finance expense.
This one time outsized realized gains in marketable securities, along with cash generated from Operation in Q4, allowed Opera to issue a special dividend of $0.80 per ADS which was paid in Feb’23.
Opera’ cash balances at the end of FY’22 was $52.4M and $65.2 when accounted for the sale of marketable securities in Q4 which settled in first week of Jan’23. Opera’s marketable securities at the end of FY’23 was $66.2M vast majority of which was sold to Yahui/Kunlun. So Opera may have net of few million of marketable securities in Q1. With continued appreciation of stock market in Q1 so far, would be interesting to see what this end up with at the end of Q1’23.
During Q3’22 Opera reported that in constant currency basis, the revenue increased by over 40%. In constant currency, the revenue would have been $94M instead of $85.3 in Q3’22. Opera did not report this and no analyst covered this. If there was similar currency headwind in Q4’22 as in Q3’22, Opera’s Q4 revenue would have been ~$102-104M+ in Q4’23 in constant currency.
Opera wrote down Nanobank Stake from $112M to to $76.3M( impairing the receivables by $35.9M) and then sold this stake to Opay for 3.1% stake. This was a good move. I did not like the terms of previous agreement where Opera stood to lose if the Nanobank valuation went down over the next 3 years but did not stand to gain if the valuation go up. Also, this 3 year receivable agreement at very low interest rate was not favorable to Opera shareholders, so good riddance Nanobank. Also, now Opera shareholders stand to benefit from the upside in Opay valuation as it continues to strengthen in Nigeria and building strong footprint in Pakistan and Egypt. Opay can use the Nanobank assets to expand in Mexico and other LATAM countries playing the same successful playbook it has built in Nigeria. I also expect a funding round of Opay at $3B+ valuation sometimes in 2023.
Overall a strong quarter beating top end of rev guidance by $5M and ABITDA by $4M. After retiring 21% of its ADS count, Opera has been climbing steadily since the Q3’22 earning release and has continued that momentum in FY23. We are seeing 1.3M+ trading volumes days with average daily volume more than doubling in last 2 months. Despite its recent climb, Opera’s stock continues to trade in undervalued category. As an Opera shareholder I am perfectly fine with it as long as Opera continues to take advantage of it by buying shares aggressively now that average trading volume has gone up. They still have over $30M left in buyback authorization and are going to generate handsome cash(~$70M) this year. At some time, Opera stock price would rationalize and that may be a very quick move up and will take many by surprise. I think Opera can double from here and still be in undervalued category such is the mis-pricing of its stock price. One good thing which has happened recently is that many investment/portfolio managers taking interest in Opera and publicly speaking about it(thus validating my thesis) which was unheard of in last year despite Opera over-performing quarter after quarter.
What is Next
For FY’23, Opera guiding for $370M-$390M in revenue and $71M - $81M adjusted EBITDA, a 20% margin at the midpoints. Opera has called out $10M headwind from the recent sanctions on European companies to provide ad services in Russia.
I was expecting conservative guidance from Opera given the macro. It speaks about their prudent confidence when many companies withheld guidance citing macro. I think Opera most likely end around $420M in revenue and $93M in AEBITDA.
After much delay, Opera cashback finally launched in big 3 ( US, UK and Germany) along with Brazil and Mexico. Opera is still testing waters on cashback, so I do not think there was any significant revenue contribution in FY’22 but this could be one of the largest growth driver for Opera in FY’23 with FY’23 holiday season bringing majority of the upside. For comparison, Honey, bought by paypal for $4B had $100M in revenue in 2018 with 17M active users. Opera certainly has the browser install base to make this $50M-100M business in next 2 years.
Opera GX is firing on all cylinders with 20M+ users. It has now reached the critical mass to grow another $10M users in FY’23 with viral effect helping with lowering the user acquisition cost as evident by the flat marketing and distribution expense YoY.
I do expect a more tighter integration of gamemaker in Opera GX with Opera ADS platform used for in-game monetization. I think this will launch this year. I have always said that if Opera can truly democratize game development like what tiktok did for video content production, this business alone could be worth much more than Opera’s current market cap of ~$800M.
Opera continues its investments in crypto space. Similar to its stated goal of democratizing game development, Opera has opportunity to democratize NFT art creation with alteon.io partnership although I do not think it would bring any meaningful revenue but can be good marketing channel for its flagship and GX browser.
Opera still has $59M receivables from StarX stake sale last year. Although I wish Opera had not sold this stake at bargain basement valuation when Opera in fact was in no need of immediate cash. Besides, Opera has only collected $28M so far from this stake sale so it did not significantly alter its cash position.
Kunlun tech china shares(300418.SZ) are up almost 70% this year. Not sure if this is because of strength in underlying business or because of strength in its 2 biggest stakes - Opera and StarX. May be Chinese market is valuing Opera more than its US counterpart.
Opay seems to be doing great in Pakistan and Egypt and with Nanobank assets, it should be able to expand and grow in LATAM as well. So would be watching out for an IPO/funding round in FY’23 at around $3-4B valuation. Opera’s 9.5% stake, will allow Opera shareholders to participate in any upside.
Opera $65M cash/$3-5M est. marketable securities along with remaining $59M receivable for StarX sale and ~$230M of 9.5% stake in Opay(based on my valuation of $2.45B) again highlight how undervalued Opera’s core business is. Even after recent run up in SP to $9, Opera’s core business which has GM of 80+% and is expected to grow 15+% in FY’23, is trading at ~$450M. It is trading at ~1.2x FY’23 revenue, ~6x AEBITDA and ~7x FCF.
GIM is finally sold out of OPRA. I think they were forced to liquidate due to steep drop in EM equities last year It was one of the largest institutional shareholder holding 5 million ADS at one time. I do not see any other top 5 public holders selling shares. Most of these positions were built with $8-10 average price.
I continue to believe Opera should be trading around $30 based on its business trajectory, solid FCF and much simplified structure. Although it looks like it will take another quarter or 2 of execution for it be discovered and have more sell-side coverage. On one hand I see lot of new interest in Opera but on the other hand, it has been pinned to $9. I would be interested to know the make up of institutional holder when it is reported May 15th. Feb 15th report did not show any surprises with top 5 holders steady with GIM selling out. For Opera to have more than double the trading volume in Q1 so far, the top 5 holders have to be the sellers which we will find out May 15th.
Overall very pleased with strong execution in Q4’22 and FY22 overall and excited about new revenue opportunities in gaming and cashback. Also looking forward to Opera trailblazing AI augmented new features in Opera browser and leading the “Browser Renaissance”.
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.
I work in tech. I may make error or two in reading financial statements and speaking finance/accounting jargon. If you think I have made an error/misrepresented fact, pls do let me know so that I can correct and learn from it.
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