Stockholm-listed Evolution develops, produces, markets, and licenses fully integrated live casino solutions to online casino operators. The company’s customers include prominent online gaming operators worldwide and several land based casinos that have expanded online.
Evolution’s revenue model consists of commission fees and fixed fees for dedicated tables. Dedicated table fees are monthly service charges to operators who have opted to provide dedicated tables for their end-users. Evolution’s key segment is its live casino, from which it derives around 80% of its revenue.
The thesis for investing in Evolution is that it is a highly profitable company with excellent financials and a strong potential for substantial growth.
The gambling industry has changed over the years and the shift from brick-and-mortar casinos to online casinos has been a positive tailwind for Evolution. Online casinos, supported by newly regulated markets and evolving consumer preferences, continue to grow substantially. The growing usage of technology, such as the adoption of mobile technology, makes it convenient for players to access online casinos and engage in online gambling.
What separates traditional and older land-based casinos is that the live casino business allows operators to differentiate themselves in the marketplace. It offers considerable opportunities to be flexible in customising the content and experience it provides to end-users, and also at a much quicker pace. Companies such as Evolution can continue to maintain strong margins through the ever-changing content that makes demand more inelastic.
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Market intelligence sources project the global online casino market size to grow at a low double-digit CAGR from 2024 to 2030. Evolution is a favoured candidate to grab the potential addressable market, as its business strategy revolves around gaining early market share in new and re-regulating markets.
Also, given Evolution’s target of growing faster than the total global online casino market, the company conducts M&A, such as the offer in July last year for Galaxy Gaming, a leading developer and distributor of casino table games and gaming technology solutions, which is expected to be completed around the middle of this year. Evolution has developed successful and innovative games, along with its market-leading sophisticated platform that is scalable and adaptable to new markets; hence, we think Evolution’s odds of executing its business strategy are favourable.
In Evolution’s 3QFY2024 results, operating revenues grew 27.9% year-on-year. Ebitda, net profits and EPS also grew 30.3%, 20.5% and 23.0%, respectively, over the same period. Business-wise, the number of games or game rounds grew 29% over the same period.
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Some highlights for the quarter include a new studio launch in Colombia and an expanded offering in North America, along with the acquisition of Arcadia Gaming Solutions, which is an Amsterdam-based video-streaming live casino provider for EUR2.5 million ($3.5 million).
During the quarter, there was also a significant increase in advanced cyber-attacks against the Asian video distribution segment, which negatively impacted Evolution’s Asian revenue. Evolution has successfully deployed measures to counteract these intrusions and will continue to scale up counter-measures aggressively. It is better to nip the problem in the bud, as similar attacks at a later period could have possibly caused more adverse effects on the company’s financial performance.
Evolution’s outlook for the rest of FY2024 involves continued expansion, including initiating one or two more casino studios and going live with the studio in the newly regulated Czech market. The company also plans to provide accelerated game delivery during this period, which should sustain its margins.
Financials-wise, the company’s margins are very healthy at 70.5%, 63.5% and 59.5%, respectively, for its ebitda, operating and net profit margins. Profitability is great, too, with a return on equity and return on asset of 28.7% and 22.9%, respectively. Evolution’s financial health is excellent, with a cash ratio of 1.8 times and a net cash position. The company also trades at attractive valuations compared to global peers, with a 41%, 9% and 32% discount for its forward P/E, EV/ Ebitda and EV/Ebit ratios, respectively.
Sentiment-wise, there are nine “buy” calls, five “hold” calls and three “sell” calls for Evolution from analysts with an average target price of 50% above its current trading price of SEK839.4 ($103.40). Based on our in-house valuations (see Charts 1a and 1b), we think the fair value for the company is SEK1,149.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account an investor’s particular financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor's own discretion and/or after consulting licensed investment professionals, at their own risk.
