Opera - Rebuttal of Hindenburg Short Report

Hindenburg came out with Short report on Opera in Jan 2020, when it was trading around $10, about 20% below its IPO price of $12. I was an investor in Opera at that time and while I do think that this report did put Opera management on notice that it is being observed for any questionable related party transactions, it was at best a shallow report, omitted key facts to make their case look genuine and it looked a waste of hindenburg's time as Opera was not at all trading at any premium at that time, and at best it had a downside of another 10-20% which made me wonder why would a short seller go such a length after Opera when there are many other potential targets where the downside is much much higher. 

With the benefit of time on my side( 18 months have passed since that report), here is a rebuttal on the key arguments(in black bold) of the short report. As you can see time has proved them wrong on most, if not all, of their arguments.

• Opera went public in mid-2018 based largely on prospects for its core browser business. Now, its browser market share is declining rapidly, down ~30% since its IPO.

  • This is only a partial truth. It is true that In percentage terms, Opera browser market share has declined from 4.3% to 2.4% from 2016 to 2020 ( source : https://en.wikipedia.org/wiki/Usage_share_of_web_browsers) but since world’s internet population is growing at CAGR of 6%, in absolute terms, Opera has been able to grow its PC browser users from 42m in 2016 to 78m in 2020. Including mobile, Opera has around 300m users of its browsers.

  • Opera launched a brand new gaming focused browser Opera GX 2 years back which has now grown to 10m users and shown the value of differentiated offering opera brings which mainstream browsers do not.

• Browser gross margins have collapsed by 22.6% in just one year. Opera has swung to negative $12 million in LTM operating cash flow, compared to positive cash flow of $32 million for the comparable 2018 period.

  • This report omits the fact that Opera has been investing into growing its fintech business in India in 2019. As part of that Opera deposited $50m as a collateral and used its own $90M of cash to fund the micro loan business which accounted for negative 12M of LTM operating cash flow.

• Opera also invested in growing its classifieds offering in Nigeria - olist and microloan offering in India - cashbean . These investments also added to  negative operating cash flow.

• As seen from the 2020 20-F, Operating cash flow recovered back despite impact from covid in 2020 showing the healthy margin profile of Opera business.

• Opera was purchased by a China-based investor group prior to its IPO. The group’s largest investor and current Opera Chairman/CEO was recently involved in a Chinese lending business that listed in the U.S. and saw its shares plunge more than 80% in just 2 years amid allegations of fraud and illegal lending practices.

  • Opera had been in business for around 20 years when the Chine-based investor group bought it. It is not logical to call Opera a fraud just because the largest investor had run into some regulatory trouble in China which impacted its business and impacted the share price.

  • As shown by recent developments in China, even bigger players like Alibaba, Tencent and Didi have run into similar regulatory trouble in China with the authorities which impacted their share price. Fortunately for Opera, none of its businesses are operating in China(other than holding a 29% minority stake in nHorizon, which operates Opera browser in China but it is not at all a significant player and is quietly fading away)  which at least takes away this overhang of managing the whims of authorities in China.

• Post IPO, Opera has now also made a similar and dramatic pivot into predatory short-term loans in Africa and India, deploying deceptive ‘bait and switch’ tactics to lure in borrowers and charging egregious interest rates ranging from ~365-876%.

  • Opera is not the only company which is operating micro loan businesses in Africa and India. While it may seem unethical by looking at the optics of 300%+ annual interest rates, but in reality, if these micro-loans are not paid in under 90 days, Opera was writing off most of these loans and taking losses. So no one was paying those 300%+ annual rates which the headline number indicates.

  • Most credit card, car loan companies have similar high interest rates in the US as well and Hindenburg is silently accepting that but quick to point out Opera’s micro lending business.

  • Since this report, Opera has merged its micro-lending business with mobimagic for a 42% stake in a new entity called Nanobank. 

  • Nanobank has since then evolved its micro lending business and max APR is 26%, in line with what most credit card and car loan companies charge in the US. Following is a snapshot of Nanobank APR in India.

• Most of Opera’s lending business is operated through apps offered on Google’s Play Store. In August, Google tightened rules to curtail predatory lending and, as a result, Opera’s apps are now in black and white violation of numerous Google rules.

  • All of Nanobank’s microcredit apps have been compliant and hence available from play store since this report published in January 2020, so we can put this argument to rest.

• Given that the vast majority of Opera’s loans are disbursed through Android apps, we think this entire line of business is at risk of disappearing or being severely curtailed when Google notices.

  • All of Nanobank’s Apps have been compliant with local regulations and Google’s play store policies since this report was published in Jan 2020 so this argument can be put to rest.

• Instead of disclosing to investors that its “high-growth” Microfinance segment could be imperiled by these new rules, Opera instead immediately raised $82 million in a secondary offering without disclosing Google’s changes to investors.

  • Opera has since then bought back $50m of its stock following that secondary offering.

  • Opera now has 200M in cash equivalent and marketable securities. Cash drain was another concern raised by Hindenburg but Opera is able to fund growth and grow into new verticals without impacting its cash negatively, showing the power of its high margin search and ad business.

• Opera’s short-term loan business now accounts for over 42% of the company’s revenue and is responsible for eye-popping top line “growth”. Meanwhile, the segment experienced massive defaults (~50% of lending revenue) and company-wide cash flow has worsened.

  • Opera has since then merged its micro lending business with mobimagic and does not report its revenue on their book. Taking out the micro credit business, shutting down its low margin retail and technology services business, it is still growing at 48% YoY putting this concern to rest.

  • As shown by 2020 Annual report, Opera has about $93M of Operating cash, putting the cash flow concern to rest as well.

  • Opera has combined its micro lending business with Mobimagic for a 42% stake under the Nanobank brand. Despite the defaults and write down which comes as  result of operating an unsecured loan/no collaterals business model, Nanobank has maintained a healthy pre tax margins of 32% despite covid related headwinds and write off in 2020.

• Post IPO, Opera promptly directed ~$40 million of cash into businesses owned by its Chairman, including $30 million into a karaoke app, and $9.5 million into an entity used to acquire a business that Opera had already operated and funded, via a questionable transaction.

  • Opera got 19.35% stake in Starmaker as result of $30M investment.

  • That $30M cash infusion along with Opera’s large user base along with distribution model, helped starmaker to grow its revenue from $12.3M in 2018 to $90M in 2020.

  • Most recently, in Q1 2021,  It was operating at a $180M run rate continuing its hockey stick growth.

  •  That $30M which Hindenburg talks about as a questionable transaction, is now valued in Opera books at $55M, not bad ROI for a 2.5 year of investment, but in reality, is worth at least 20-40 times in a funding round or an IPO.

• We think Opera collapses on its own worsening financials, with that timeline accelerating significantly if Google bans its lending apps or if its Chairman/CEO continues to draw cash out of the business through questionable related-party deals.

  • About 18 months have passed since this report, Opera core business is thriving, forecasted to grow at 48% YoY in FY ’21.

  • Using high GM search and advertising business, Opera is able to fund new business verticals - Gaming and Fintech,  without drawing down from its cash.

  • 2 of Opera’s minority stakes are growing upward of 100%, one had a recent funding round from Softbank at $2B valuation, other is operating profitably at a $180M run rate.

  • With recent monetization of its partial Opay stake, Opera has increased its cash, equivalent and marketable securities to $200M which provide ample room to continue to prudently invest and grow the business.

  • Opera business fundamentals, recent results and growth opportunities does not show any signs of a business which is on a decline or collapsing but rather a thriving business which is so far under appreciated by funds and investors.