OPRA stock - 2021 Recap and what to look for in 2022
For those of you who believe in Opera’s story and its massive appreciation potential, 2021 has gone by leaving much frustration. The better Opera executed as the year progressed, the more the market punished it. Opera started the year with a forecast of $220M in FY’21 revenue but it will now end between $250-$260M. Opera started the year at around $9 and then quickly jumped to around $13 but as of this writing Opera is trading around $7(~800M market cap). When the rest of the market was going up early in the year, Opera was left stagnant while many high multiple stocks became more and more expensive. Now when these high multiple stocks are getting crushed, Opera is lumped with those and penalized alike.
I still strongly believe in Opera’s potential and my conviction has gotten stronger as the year progressed and as I dug deeper into Opera’s business model and its potential as part of my research. I still believe Opera was massively undervalued at $12 when I wrote my original analysis back in March’21 but to rub salt into my wounds, it is now ridiculously valued at $7. My research can be read here and here.
Just a brief summary of how ridiculously low Opera is trading, here are the numbers
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(high end) - $250M revenue, $25M AEBITDA
Trading at ~0.92 x FY '21 Est. Revenue
Let's take a moment to have these numbers sink in. Opera, a 95% gross margin company with 50% growth, is trading at 0.9 times its FY ’21 revenue. If you take the very conservative 25% growth forecast to $312M FY '22 revenue and 20% AEBITDA, Opera is trading at 0.7 times FY ’22 revenue and 5 times AEBITDA.
So Why Opera stock is so disconnected
Opera’s stock is trading as if the market thinks that Opera has been falsifying its revenue/financial numbers and the market is expecting that Opera will restate its number any day. Of course a possibility but highly unlikely.
Opera is a Norwegian company with the majority of the leadership team including CFO, Frode Jacobsen, are Norwegian/European citizens and are bound by the securities laws of EU/Norway. Any lawsuit and resulting negative publicity against Opera due to financial wrongdoings will be a nail in the coffin for Opera's business model considering Opera touts its privacy and security features as key in convincing people to move away from default. Who can trust a company which is involved in financial fraud/crime. Considering Opera’s upcoming move into e-commerce/fintech where Opera is expecting its users to save its payment methods in its crypto wallet depends on how successful Opera is in furthering the trust with its user community and Opera Management would not do anything foolish which can cast Opera in a negative and untrustworthy light.
Let’s evaluate the negative factors, contributing to Opera’s stock to slump, which I heard when I discussed this massive disconnect with friends and read on social media.
Majority Chinese ownership of its Chairman/Co-CEO, Yahui Zhou : The geo-political landscape between China and US has been on a wild ride in the last couple of years and Opera is clubbed with other Chinese companies who have their majority operations in China. But there is a major difference, Opera does not drive any meaningful revenue from China though. Majority of Opera’s revenue is coming from Europe and Africa and now with the expansion of Gaming and News in the US, Opera’s US revenue is also on a significant uptrend as evidenced by increase in ARPU mentioned in last earnings call. So other than being majority owned by Chinese nationals, Opera has nothing in common with Alibaba’s and Didi’s of the world. In fact, the geo-political issues are here to stay and being a global and neutral player is the best way for any company to stay clear of the political narrative between China and the rest of the world. In fact, It is in Yahui Zhou’s best interest to bring his stake down to below 50% and make Opera a truly global company – be it in terms of distribution of its user base or revenue contribution by geography or the stock ownership. Only this can ensure that Opera can continue to gain market share in both US and Europe even amongst geopolitical uncertainties.
I think Opera and Yahui Zhou both have to look no further than how the geo-political situation unfurled in India and how it negatively impacted a fast growing fintech business(Cashbean/Nanobank) in India. I think a myopic approach and short sighted business decisions have led to Nanobank having to temporarily shutter its India operation. It was a very fast growing business with potential to expand further into India’s burgeoning lower-middle and middle class, and had Opera/Nanobank taken a local partner approach with international operations, situations would have been a lot different. A company labelled as Chinese is fraught with risk of losing significant part of business when it derives 99% of revenue outside china.
Importance of an international company with less concentrated majority ownership will become increasingly important in coming years as more and more countries put walled gardens around their internet population. Less than 50% ownership by Chinese citizens and endorsement by having a global investor base of US/European investors will go a long way in ensuring Opera can succeed in Western markets.
Rumor’s of taking Opera Private : One argument I heard of late is that Yahui Zhou will screw OPRA ADS holders by taking Opera private as it is trading at fire sale valuation. In fact, he added about 1.9M ADS in Nov at around $8.50 per ADS when the stock dipped after the Q3 earnings call. So clearly, he knows how ridiculously low Opera is trading at the moment. He bought Opera for around $6 in today’s price back in 2016 when Opera browser was losing market share, had no other revenue stream, was not growing at all and was losing money. Now Opera’s revenue has more than doubled, growth rate expected to continue at a CAGR of about 20-30% for next couple of years, it is growing user base, and is massively profitable with several different revenue streams in exciting vertical’s of gaming, fintech and web3 and owns minority stakes in 3 exciting businesses of Opay, Starmaker and Nanobank. How ridiculous it is to think that Opera is trading at below that $600M price which Yahui and his investment partners paid in 2016 considering the $200m in cash/equivalent.
It is certainly a possibility and tempting idea to take it private by paying even a 100-150% premium at around $15-20 SP and later float it again at much higher valuation but I think it would be a penny wise pound foolish sort of decision.
Opera should not risk being labelled as Chinese which competitors or media would portray if Opera again became a private company. In fact, Yahui Zhou should clear the air once and for all and let Opera reach its fair valuation and then offload his stake to below 50% when the SP trades at fair value which I think is around $35-$40 at the moment considering FY ‘22 revenue of around $340M-360M at the high end, with 20-30% Operating margins and 20-30% CAGR for next couple of years and stakes in 3 exponentially growing businesses.
Staying an international company is the only way companies can avoid being restricted to one or few lucrative markets amidst the geo-political risks and when Opera is not majority held/controlled by a single Chinese entity.
Opera's value proposition is based on security and privacy and as users become more conscious and aware about the implication of a less secure and less trusted environment, one negative publicity can bring Opera down. Right or wrong, being labelled as a Chinese company is not the best way to market Opera as secure and private.
All in all, I think, the media commentary about Chinese Ownership and taking it private is a scare tactic to cast doubts among new investors so that they do not consider Opera as an investment while the vested interests keep Opera’s stock price low in the hope to shake the impatient investors.
Low Float : Opera floated around 20M ADS in 2 offerings and has since bought back around 7.5M of those at around $8.50 in price. With stock grant dilution, basically Opera has a float of around 15M ADS and of those around 14M are held by institutions. One argument I heard is that due to low float, the sell side is not interested in covering Opera as seen by anemic coverage Opera has received from the investor community.
This is a chicken and add problem. The top institutions are either holding steady or adding to their shares with the exception of Toroso Investment which made OPRA part of its $BLOK ETF when it bought ~1.5M ADS back in Feb and then unloaded all of it on the same day in June, taking 30% loss, causing 25% drop in stock. As the results from Q2 and Q3 showed, there was nothing in Opera’s business metrics or the outlook which warranted the sharp sell off. In fact, Opera had a beat-and-raise quarters in both Q2 and Q3, so why the Toroso money manager sold Opera so dramatically is still a mystery to me.
There's not much Opera can do about it. Opera has continued to execute well and I think this low float will spark the parabolic move which I have been talking about for the last 6 months. Opera should not do a secondary at such a fire sale valuation to increase float and I do not see any reason why any of the existing or long term investors will sell either especially when there is so much value and upside considering how high multiple stocks are still trading at much higher multiples even after recent sell off.
In fact, Opera Management knows that if Opera announces a stock buyback, Opera stock would quickly shoot into 20’s as a result of the announcement. Hence while Opera as a company was not doing anything to support its other investors and let the stock price slide, knowing that any stock buyback would cause the price to shoot up, Opera’s chairman, Yahui Zhou, bought 1.1M ADS on open market at a fire sale valuation of around $8.5. Had Opera announced stock buyback, he would not have been able to buy those 1.1M ADS at such low valuation. So Opera’s management in-action in-fact benefited its chairman Yahui Zhou by allowing him to buy 1.1M ADS at dirt cheap price.
Boring Browser Business : After all, Opera is a browser company. Browsers are considered like utilities - Power, water etc. People only appreciate the importance of these when they are down. Market is giving a significant discount to Opera because of its utility-esque business model. But Opera is much more than that. Opera has been growing at 50% YoY as it has used its browser user base to successfully launch many additional businesses like fintech, news , gaming etc. In fact, a global user base of 300M browser users is an advantage for Opera as it needs to spend little to bring additional products to its users.
Eventually the market will realize how sticky Opera’s user base is and how Opera can use its browser plus strategy to launch into additional verticals and quickly gain scale on the basis of its 80M PC browser users, 200M+ mobile browser users and ~12M Opera GX users.
I believe in Opera Management when they say that the history of browsers has not been written completely and Opera is one of those companies helping chart the course of browsers.
Opera’s business recovered quickly from the covid related advertising slowdown in 2020 and has come out much stronger than when entering it. Let’s recap what worked well and what did not in 2021.
The Good -
50% YoY revenue growth from $165M to estimated $255M-260M in 2021
AEBITDA expected to be on high end of original forecast of $10-25M
Clarity in Opera’s Gaming Strategy and fast and decisive execution. Opera bought YoYo Games in Jan 2021 and in less than a year, Opera has solid business plan, clarity in its strategy/objectives and built a strong leadership team to execute fast on the growing intersection of gaming and metaverse.
Strong growth in ARPU contributed by Western/US market focus aided in part by laying the foundation to grow its Opera Ad business.
Successful launch and strong growth of Opera News in western markets. Opera News became a top 5 news app in Germany, France, UK and US and has played the most significant role in Opera’s FY’21’s 50% revenue growth.
Opera GX browser continued to gain a strong following among gaming enthusiasts helped in part by the many leading influencer endorsement.
Launch of GXC to democratize game development and publishing and build a community around it . If Opera is even partially successful in realizing its vision, this initiative has the potential to add $100M+ yearly revenue to Opera’s top line in a couple of years at a very profitable business model.
Opay funding round at $2B valuation strongly validating Opera’s browser plus business strategy. Opera stake got diluted to around 6.5% though after Opera cashed out 29% of its stake
Continuation of exponential growth(150+%) in starmaker to ~250M revenue. Opera holds 19.35% stake.
Nanobank’s strong launch in Mexico, offsetting some of the setbacks from scaling down India operation. Opera holds a 42% stake in Nanobank.
The Average -
Opera’s Crypto effort. Opera has made several disparate attempts to outline its Crypto Strategy. Every few months in 2021, they have released some sort of Crypto news but have so far failed to build a cohesive strategy around how Crypto/Web3 can help Opera gain users first and/or monetize it. Considering Opera has native Crypto wallet developed in 2018, Opera has been very slow in first defining its web3 strategy and then its execution. It was a half hearted attempt at execution in 2021 on the Crypto/Web3 front.
Opera’s financial and metric reporting. Opera has been very wayward in reporting metrics consistently. They started off with sharing Opay and Starmaker metrics but stopped half way. They have not given the analyst a set of consistent user or business metrics other than lumping financial metrics in two broad categories - search and advertising. Also, they will sometimes pre-announce when they beat the guidance and other times do not.
The Bad -
Opera Stock Price - Opera stock price acted irrationally all of FY21 and it is now trading at ~$7, significantly below even firesale valuations.
Opera is sitting on ~200M cash/equivalent —25% of its market cap – when it has previously bought back shares at much higher price at much lower revenue and financial metrics base.
Divesting 29% stake in Opay – A fast growing business – when Opera had no plans for using that cash. Letting the stake sit steady would have allowed Opera to monetize at a later time when Opay is valued at $3-4B in the next funding round/IPO.
Dify - Opera spent much of 2020 highlighting focus on fintech and launched a fintech BU after buying Pocosys in early 2020. They started off with Dify Wallet in Spain in Feb 2021 with the intention to launch additional European countries later in the year. So far, they have launched none and most likely Dify Wallet has been discontinued. It seems Opera had a strategy pivot on Dify and dropped plans to offer its own BNPL offering as earlier planned.
Fjord Bank - As part of its fintech ambitions, Opera also bought a 10% stake in Fjord bank with intention to buy 100% after regulatory approvals, mostly for license purposes with the ambitions to offer broader banking offerings in Europe. Opera seems to have dropped these plans.
Along with Dify Wallet, Opera launched the Dify Cashback feature in Spain to integrate cashback natively into Opera browser. It had plans to launch in several countries in 2021. So far, this has not been launched in any of the Big 3 ( Germany, France and UK) and most recently they launched in Poland, Ukraine and Russia.
Olist : After investing a lot in Olist in FY’19 and FY’20, Opera seems to have abandoned its classified offering in Nigeria.
What to Expect in 2022
Opera continues to guide conservatively when they report Q4’20 numbers and guide for 2022.
Opera guiding for 20-25% growth at midpoint for FY22.
Reinvest back the profit to grow new verticals – continuation of FY’21 theme. Adjusted EBITDA of 20% at the high end of guidance.
Opera Crypto Browser : Similar to the gaming browser, Opera GX, Opera will launch its Crypto browser in early FY 22 which will bring together Opera’s Web3/Metaverse strategy. Every million users of its gaming browser, GX, bring $2.7M in revenue and I expect Crypto users would be monetized at a similar level.
Renaming of Opera’s fintech division to Opera’s Ecommerce division with launch of Dify cashback in Big 3 ( Germany, France and UK) along with 3rd party BNPL integration.
Opera announces partnership with Affirm to make Affirm BNPL offering to users in Europe in its native PC browser.
Potential IPO of starmaker and OPay in late FY’22 or early FY’23.
Opera continues to invest and place green field bets in offerings like Loomi - its video on demand service with a social twist. Most likely though, it will be abandoned like Dify Wallet by the time we enter FY’23.
Opera Stock Price in 2022
I have been talking about the parabolic move in Opera into $30’s for quite some time which did not materialize in 2021 despite Opera beating and raising guidance every quarter. If Yahui Zhou can issue a prepared remark in Q4 '21 results about his position and stake and/or show up on the earning call and take questions from analysts, it would be a strong vote of confidence which can propel Opera into $30’s after Q4 ’21 results.
For FY 2022, I think Opera has a strong potential to do a 40-50% revenue growth year and if Opera can start beating the conservative guidance which it will give through out FY ‘22 earnings calls and generate some excitement and strong traction with the intersection of its gaming and metaverse/web3 efforts, Opera stock can certainly reach my bull case scenario of around $70 by end of 2022.