Disclaimer: This newsletter is not financial advice it is for educational purposes only. Please DO NOT take this newsletter as a buy or sell signal.
Below is a checklist I normally use when analysing a company’s fundamental health. If the company meets my criteria it will be colour-coded in green and if it fails to meet my criteria it will be colour-coded in red which means I need to investigate further and ask myself why this is the case.
As you can see below Evolution AB meets all my criteria.
Founded in 2006 by Jens von Bahr and Fredrik Osterberg, Evolution AB develops, produces, markets, and licenses online casino systems to gaming operators in Europe, Asia, North America, Latin America, and internationally. Evolution AB operates several online casino brands under its umbrella including Evolution, NetEnt, and Red Tiger. Each brand specialises in providing a variety of gaming experiences for players including live dealer games, slot machines, and software solutions.
Live Casino- Evolution AB’s live casino offers players a blend of real-time interaction and authentic gaming experiences that enable them to engage with live dealers. The dealers in the live casino are trained professionals who create a fun and welcoming environment for players. One of the popular games in Evolution AB's live casino selection is Crazy Time. This game has become popular due to its colourful graphics, fun gameplay, high engagement and the opportunity to win big prizes through various bonus rounds. The average number of hourly players per day for Crazy Time is 351,365. Another popular game for Evolution AB is Funky Time. This game is popular due to its 1970s disco theme, multiple bonus rounds with a chance for massive multipliers, and fast-paced rounds designed to keep the action going with minimal downtime between spins.
Random Number Generated- The random number generator (RNG) section of Evolution AB's collection offers a unique and exciting side of online gaming. In this section games use algorithms to decide the outcome. Gonzo’s Quest is a well-known RNG title from Evolution AB. In this game players join Gonzo(a treasure hunter) on a quest to discover the legendary city of gold. Gonzo Quest uses a unique avalanche mechanic where symbols fall into place instead of spinning reels. When players form winning combinations it triggers additional avalanches that increase your multipliers and chances for big wins. Another popular game is Mega Ball which blends elements of bingo and lottery. Players can purchase cards with numbers and wait for the draw to see if their numbers match. This game features multipliers that can boost payouts which adds to the excitement for those aiming for life-changing wins. RNG table games such as blackjack, roulette, and baccarat are also available. These games offer different styles and betting options e.g. European Roulette provides a classic experience with faster gameplay by removing live interactions which makes it perfect for players who prefer a quicker pace.
When evaluating management I judge the CEO based on several factors such as experience, capital allocation skills, and Incentives. In this section I will discuss whether management incentives are aligned with shareholders.
Experience- Martin Carlesund has been the current CEO of Evolution AB since November 2016. His previous roles include President of Evolution Malta in 2015, Acting President of Eniro Finland Oy, and President of Eniro Sweden at Eniro AB. He also held the positions of CEO at both Eniro Sweden and Eniro Finland as well as Head of Business Projects at Eniro AB and President and CEO of 3L System AB. He earned a Master of Science in Economics and Business Administration from the University College of Borås and the University of Gothenburg.
Below is an image illustrating the current experience of Evolution AB board members:
Capital Allocation- Capital allocation is very important when judging management because I want them to create value for shareholders not destroy it. So far Evolution AB management has done a great job with capital allocation. They are providing value back to shareholders by reinvesting in the business to further expand their presence, paying dividends and buying back shares.
Evolution AB currently pays a dividend with a yield of 3.71%. This dividend is sustainable because it only covers 49% of the company’s free cash flow.
Incentive- This is important because if the current board is buying shares of their own business it indicates that management believes the stock is undervalued and is confident in the company’s long-term prospects.
As you can see below we have 3 buy orders and 1 sell order. Martin Carlesund (CFO) and Jacob Kaplan are the only insiders buying Evolution AB shares. As for selling Martin Caresund is the only insider selling Evolution AB shares but I am not going to put too much weight into this because there are so many reasons why someone might sell their stock.
Bull Case- The first bull case is The Growing Online Gaming Market. The online gaming industry is experiencing rapid growth. As more people gravitate towards online casinos Evolution AB is likely to benefit from the increased demand for their live game services. Projections indicate that the online gambling industry could reach between $153.6 billion and $182.2 billion by 2030 with some analysts predicting figures as high as $286.4 billion by 2035 which represents a compound annual growth Rate (CAGR) of approximately 11% to 13%.
Bull Case - The second bull case is a Market Leader in live casino. Evolution AB is a leading provider of live casino solutions. Their reputation and established market presence give them an edge over competitors which attracts more operators to partner with them.
Bull Case- The third bull case is Expansion into regulated markets. The ongoing legalisation and regulation of online gaming in new markets particularly in the U.S. and Latin America provides a clear long-term growth runway. Evolution is already partnered with major operators such as DraftKings and FanDuel securing its presence in newly regulated states.
Bear Case - The first bear case is Intense Competition. The online gaming industry is highly competitive. Competitors like Playtech PLC and Light & Wonder are getting stronger. Their growing presence in the most-played games lists indicates that Evolution AB’s virtual monopoly is being challenged.
Bear Case- The second bear case is Regulatory Risks. The global regulatory environment for online gambling is constantly changing. As more countries regulate compliance costs tend to increase which could put pressure on Evolution’s industry-leading margins.
Bear Case- The third bear case is Technological Disruptions. Rapid advancements in technology may lead to new gaming formats or platforms that could make Evolution AB's current offerings less appealing.
In this section, I will discuss valuation. Using some basic metrics I will compare Evolution AB to its industry rivals and determine whether the company is cheap relative to its peers. Then I will value Evolution AB using a discounted cash flow model to determine a price I am willing to pay based on its expected growth rate and my desired return of 15%.
As shown below when compared to its peer Evolution AB scores 3/5 while Playtech PLC scores 2/5. Below I am going to highlight the key differences between the companies:
Business Model - Evolution AB operates as a pure-play B2B provider that focuses primarily on live casino games although it has also expanded into RNG (random number generator) slots through various acquisitions. The company’s main revenue stream comes from a commission-based model where it earns a percentage of the winnings from its operator partners who use Evolution AB’s games. Additionally Evolution AB charges fixed monthly fees to operators who want exclusive or branded live casino tables. This revenue model is highly scalable and results in industry-leading margins that have historically exceeded 60%. In contrast Playtech PLC operates a more diversified business model that includes both B2B and B2C segments. Its revenue consists of a mix of B2B service fees and income from its direct-to-consumer gambling operations such as its Italian subsidiary. Playtech PLC's broader operational scope and combination of B2B and B2C activities result in significantly lower profit margins compared to those of Evolution AB.
Market Reach- Evolution AB maintains a leading position in the global live casino market. The company has a strong presence across regulated markets in Europe and North America, and has historically generated significant revenue from less-regulated Asian markets. Playtech PLC is also a notable player in the market holding the second-largest share in the live casino segment though it remains significantly behind Evolution. Playtech PLC has also made considerable progress with its expansion strategy in the U.S. by leveraging its partnerships with Hard Rock Digital.
Product Offering- Evolution AB specialises in a wide range of high-quality live casino games. Its games include traditional table games like blackjack and roulette as well as popular and creative game show titles like Crazy Time and Monopoly Live. Evolution AB is widely regarded as the industry leader in live casino innovation where they are consistently launching new formats that set industry standards. The company has also made strategic acquisitions by acquiring NetEnt and Red Tiger to strengthen its RNG slot portfolio. Playtech PLC offers a wider range of gaming software that includes live casino games, RNG slots, sports betting, and poker platforms. While Playtech PLC has improved its live casino product and received industry awards the company is seen as following the example of Evolution AB in innovation.
As you can see based on my conservative assumption, Evolution AB is looking to grow 6-8% over the long run so I went conservative and assumed a 6% growth in the first 1-3 years then the growth will slow down to 3% 4-6 years out. In my assumption I also went with an exit multiple of 16x earnings which is below the historical average at which Evolution AB has traded. Based on my assumption I have come to a buy price of $85.82 compared to the current stock price of $84.86 which means right now Evolution AB is trading below intrinsic value.
Thanks for reading my newsletter on Evolution AB. Disclaimer: This newsletter is not financial advice. This is for educational purposes only, so please DO NOT take this as a buy or sell signal.
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