Description

Opera Limited (Ticker: OPRA), based in Norway, and incorporated in the Cayman Islands, trades as an ADR in the US and is a global internet brand offering Opera browsers used by approximately 300 million monthly average users.

Opera offers differentiated PC browsers that are performance-optimized for Windows, macOS and variants of Linux, and performance-optimized mobile browsers for Android and iOS. Opera has also launched an AI-powered browser, and offers news- and gaming-related browsers.

Opera partners with search providers such as Google and Yandex, with whom they share revenues. Opera also has relationships with a variety of leading digital advertising platforms.

Revenues

While search revenue used to predominate in the business, over the last 12 months, advertising has accounted for 59% of revenues, with Search comprising 41%. In the most recent quarter, ad revenue grew by 20%, and search revenue grew 15% year-over-year. Opera’s sweet spot is at the intersection of sophisticated gen-z web and mobile web users and gamers. 77% of new users come from organic traffic, for instance through word of mouth.

The average annualized search and advertising revenues per user has climbed steadily from $0.39 in early 2019 to $1.46 in the most recent quarter, which was up 25% versus the second quarter of 2023. The company expects an annualized ARPU of $1.61 by the end of 2024.

Competition

Opera competes with other global browser developers, including Google (Chrome), Apple (Safari), Microsoft (Edge) and Samsung, as well as with smaller independent browser companies, such as Mozilla Firefox, Brave, Avast, Yandex, DuckDuckGO and UC Web.

EU Legislation

Recently, the EU announced it Digital Markets Act, which targeted larger players like Google, Microsoft and Apple for unfair competition. Under the new rules, mobile software makers are required to show a choice screen where users can select a browser, search engine, and assistants, when they set up their phone. Previously, tech companies offered phones with default settings that included only their services, and made it difficult to choose alternatives. Additionally, before the DMA, every browser on iOS had to run on WebKit, the engine that underpins Safari. Under the DMA, Apple has to permit non-WebKit engines on iOS.

These changes have led to an explosion of usage for the smaller independent providers. Opera has stated that the biggest effect they are seeing is in users making Opera the default browser on their iPhones.

Investment in OPay

Opera owns a 9.4% ownership interest in OPay Limited, which Opera founded in 2018, and which is a Fintech company offering payment, digital wallet and other financial services to emerging markets such as Africa, Asia, and the middle east, where app users can create an account using their phone numbers. This has been revolutionary in many economies, such as Nigeria, where it is used by ride-hailing drivers and artisans who want to get paid quickly.

In 2022, OPay announced a partnership with Mastercard, whereby OPay consumers and merchants to engage with well-known global businesses via a Mastercard virtual payment solution linked to the OPay eWallet, regardless of whether the customer has a bank account.

OPay quadrupled its customer base in 2023, and is currently nearing 10 million active trading users, with $12 billion of monthly transaction volume, and earlier this year announced its first monthly profit. According to Opera, OPay’s valuation is currently nearing $3 billion, putting Opera’s ownership interest at approximately $280 million, or approximately one fifth of Opera’s market capitalization of $1.3 billion.

Margins

Opera’s operating margins for the most recent quarter were 20%, EBITDA margins were approximately 24%, and the net income margin was 18%.

Dividend

Opera recently declared a semi-annual dividend of $0.40 per share, representing a 5.4% yield.

Valuation

Opera has earned $0.93 per share (excluding the Fair value gain on investments) over the past 12 months, resulting in a TTM P/E of 16x. Opera’s TTM EV/Adjusted EBITDA ratio is 12.5x. We think this is reasonable for a company that grew its revenues 16% in the second quarter of 2024 versus the second quarter of 2023. We think Opera can earn $1.10 per share in 2025, resulting in forward P/E of 13x.

Summary

Certainly, it’s hard to disentangle the effects of the EU legislation from the recent surge in revenues. That has had a big impact whose influence may recede in the coming quarters. But western market users make up only 17% of total users, and with the rest of the world making up the other 84%, growth should continue even if EU growth slows. We also feel the valuation is not too extreme at today’s price, and the prospects for continued growth are reasonable. The OPay investment seems to be growing very quickly, and its app is being used in multiple emerging market economies, where it provides a valuable service that does not rely on the traditional banking system. So with the investment, you get an emerging markets fintech kicker, to the extent that is monetized and shared with shareholders, which we hope happens.

Catalyst

-Continued growth in core markets

-Success / monetization of OPay investment