What is this Opera about?

After two decades Opera Software (NASDAQ OPRA $10-12) has launched an IPO in the US. The deal is expected to price today, July 26th for trading tomorrow. Growth is being driven by the new Opera News product which fills a gap for users wanting a personalized experience – especially outside of developed countries and with under-served languages.

A Bit o’ History

The company is mostly known for their “indie” browser which competed against others like Firefox and Chrome against the OS-based Safari and Internet Explorer. Suffice to say that Chrome won that battle and the others hang on since they are integrated into the leading operating systems and will always be the “default” for an average user.

This story took a twist in 2016 when Opera was acquired by Chinese interests who wanted their code base and user population as a springboard to use for new products. There’s more to the story because the deal was initially for the whole company for $1.2B but that fell through. Subsequently, the Chinese consortium agreed to buy a subset of the company assets including the browser for $600M. You can read more about the details in this TechCrunch article on the sale of the Opera assets.

Although Opera is hardly known in developed markets like the US and Europe, they have built a strong presence in some parts of the world, particularly Africa. The company cites 322m MAU but doesn’t provide comprehensive metrics to determine just how active these users are.

The business model has been advertising-based with the bulk of it coming from “partners” like Google who provide the search results to users of the Opera browser.

This model is evolving – today the growth driver for Opera is an AI-driven News product. The growth in personalized content is allowing Opera to generate more revenue directly from advertising. It also provides a non-browser-based growth path and paves the way for additional products.

So what is Opera Now?

Opera is still based on a browser but they have integrated more services (like the news product) into it. For example in the screenshot below the user has greater access to other services like FB Messenger and WhatsApp. The “speed dial” and newsreader are all configurable so it’s easier to customize the content and streamline some typical browser workflows.

Opera also offers better integration between mobile devices and your browser session. The mobile world tends to center around the device itself and “apps” rather than use a browser-based paradigm. It’s exactly the opposite on a laptop or desktop computer. But it doesn’t make any sense not to be able to access mobile systems from your computer and Opera provides some basic tools to do that and share information between the two worlds.

It’s important to note that Opera is focused on Android and this aligns with their current market profile in less-developed countries where iOS is far less popular.

Opera is monetizing with advertising. Some of the larger payers are obvious from the bookmarks bar and the default “speed dial” setup – Amazon, Walmart, eBay, Google, TripAdvisor, and Booking.com.

The bulk of Opera revenues come from the advertising share they get from search engines like Google and Yandex. This search-based revenue share could be risky if Google decides to be more aggressive with personalized news. However, it would be difficult for them to detach from Opera, especially given the current environment outside the US regarding anti-competitive behavior.

Valuation

Until the launch of Opera News, the company wasn’t experiencing a great deal of growth. Use of the Opera browser had leveled off. As one can see in the figure below the growth of Opera News has been strong and it’s beginning to drive overall company results.

Investors will like the fact that Opera is already profitable and plans to expand their operating margins going forward. Since acquiring the Opera assets in 2016 new management has achieved 30 points of operating leverage through reduced personnel and lower costs for marketing and distribution. That drove adjusted net income to 25% in 1Q 2018.

Their long-term target model suggests they can get more operating leverage in these areas and achieve 30%+ levels of net income margin. Due to their foreign company status, the overall effective tax stays at 20%.

In computing our Intrinsic Valuation (IV) we decided to use a 30% growth rate (and 30x P/E multiple). The company grew faster in Q1 but we’d like to see more quarterly history to believe that it’s sustainable.

In terms of margins, we’re giving them some room for expansion – to 30% rather than the 35-45% shown in their LT model. This can go under the “we’ll see” reason as well. Management may have picked most of the low-hanging fruit in terms of cost savings and future margin expansion could be more difficult.

Our IV indicates that the shares can do well from the proposed IPO price. We wouldn’t be surprised to see investors be wary of $OPRA because it is an unusual name – non-US, kind of Chinese owned, focused on emerging rather than developed markets and not well known in the US consumer market.

As a side note at the mid-point, the buyers of Opera will have doubled the value of their investment in just two years. If the shares reach our IV will be an almost 4x!

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