Opera (OPRA)

Hi everyone! Inspired by Bear’s suggestion to continue “finding the opportunities” available in the current investing climate, I wanted to present my first company analysis to the board. I hope you like it!

I’m a digital test prep tutor (think SATs, ACTs, GREs, you name it), and in this line of work, I’ve come across a lot of consumer-facing tech products. Some of these products are absolutely indispensable (cough Zoom), while others are nice to have but not entirely necessary.

One tech niche that, frankly, I’d taken entirely for granted is web browsers. I’ve been a Chrome user for years now, and I think of it as more a utility than anything else – it does what I need it to do, and that’s where my consideration of its value ends. It never occurred to me that web browsing was even a “market,” in the traditional sense of the word.

So imagine my surprise when I learned that there’s a browser out there growing like a weed! Opera (OPRA) has carved out a fascinating segment of the web-browsing market, and it is with great enthusiasm that I present it to all of you as my newest investment idea.

AT A GLANCE

Price: $6.16
Market Cap: $733 million (119.1 American depositary shares outstanding)
TTM Revenue: $423.2 million
Revenue (last 4 quarters): 61.7, 93.7, 129.6, 138.2
% Revenue Growth (last 4 quarters): 55%, 119%, 158%, 177%
P/S Ratio: 1.7
EPS (TTM): $.36
P/E Ratio: 17.1
Total Cash: $216 million

WHAT THEY DO

At present, there are roughly 4,500,000,000 Internet users in the world, a number that represents 59% of the global population. That leaves 41% of the world offline, a number that figures to decrease precipitously over the next decade. Opera’s goal is to become the browser of choice for these new internet users – most of them in sub-Saharan Africa and India – while also making inroads with the “mature” Internet economies of North America, Europe, and East Asia. (Their mission might make it seem as if Opera is a niche upstart, but they’re not: as of 2019, Opera currently has a total user base of 360 million MAUs.)

Opera has developed a suite of differentiated browsers, each of which is tailored to a unique browsing environment and experience. (This sets it apart from other browsing alternatives, which are largely the same regardless of platform or browsing purpose.) Below are all of Opera browsers currently in operation:

Opera for Desktop
Opera GX (gaming-specific browser)
Opera for Android
Opera Touch
Opera Mini
Opera News
Opera for basic phones

Variation in these browsers allows Opera to penetrate into regions with low bandwidth/data availability. The ever-changing nature of the COVID-19 pandemic has only accelerated the adoption of these browsers – everyone, regardless of location, needs news more than ever these days.

Like other web browsers, Opera has a built-in search engine, from which it derives Search and Advertising revenue. These two segments have grown modestly over the past 4 quarters, and they figure to maintain that growth for as long as Opera expands to new users. (FWIW: Search actually decreased 4% Y-o-Y due to COVID-related pricing pressure, but this figures to be a temporary downshift.) Of course, Opera is unlikely to dislodge Google from its position as the world’s search engine of choice, so if they’re to succeed, they need another lucrative revenue stream.

That’s where Opera’s fintech initiatives – OKash and OPay – come in. Taken together, these two initiatives have eye-popping growth Y-o-Y, from $5 million in Q1 2019 to $94.7 million in Q1 2020. In the same way Opera is able to provide low-bandwidth Internet access to predominantly “offline” areas, it also provides lending capital in areas traditional lenders have been loath to venture. COVID-19 has naturally had an impact on Opera’s willingness to loan, but according to the most recent earnings call, management expects only mild short-term headwinds here. The most recent quarter would have reflected an operating profit if not for a one-time $27 million loan loss provision due to COVID-19. It’s difficult to say for how long COVID-19 may depress Opera’s lending, but as things business conditions return to normal, I expect that these fintech initiatives will resume their robust growth rates.

Opera GX represents another possible avenue for exponential growth. Introduced in June 2019, Opera GX already has 3.4 million users, and management sees room for ample growth. I think this quote from the most recent call sums up not just Opera’s approach to their gaming browser, but to the segmentation of the web browser market generally: “strong monetization from the gaming segment highlights our ability to drive browser growth by focusing on a specific vertical or user need.” I don’t expect that browsers differentiated by use case will become the standard, but the prospect of further differentiation is intriguing!

Despite Opera’s rapidly improving business fundamentals, they were the subject of a short report from Hindenburg Research earlier this year. The report alleged that Opera was guilty of predatory lending practices and that their entire fintech arm was in danger of collapsing. I’ve tried to investigate these claims as objectively as possible, but I can’t find anything to compellingly substantiate these claims. Additionally, I find it telling that fintech revenue has essentially doubled since the short report was published. In any case, I’ve linked to the Hindenburg report below so that you can all form your own opinions.

RELEVANT LINKS

Q1 2020 Financial Results: https://investor.opera.com/news-releases/news-release-detail…

Q1 2020 Earnings Call Transcript: https://seekingalpha.com/article/4349052-opera-opra-manageme…

Q4 2019 Financial Results: https://investor.opera.com/news-releases/news-release-detail…

Q4 2019 Earnings Transcript: https://seekingalpha.com/article/4326965-opera-limiteds-opra…

Opera Wiki: https://en.wikipedia.org/wiki/Opera_(web_browser)

PCMag Review of Opera: https://www.pcmag.com/reviews/opera

Hindenburg Research Short Report: https://hindenburgresearch.com/opera-phantom-of-the-turnarou…

Opera’s Rebuttal to Hindenburg: https://www.cnet.com/news/opera-defends-its-android-apps-aft…

SUMMARY THOUGHTS

I first found out about Opera while teaching a student based in China. After some cursory research, I asked around to see if anyone I knew had heard of or used this browser. Not a single person – all of them American, British, or Kiwi – had.

It’s no surprise, then, that Opera is little followed or covered as a public company: they focus on a largely neglected and underserved market segment. Personally, I believe that a savvy investment lies in this chasm between market opportunity and valuation. If we were to assign Opera a P/S multiple equivalent to the lowest multiple of other software companies owned on this board, we’d be looking at price appreciation of about 500%. Opera would have to get only a fraction of the way there, of course, to be a worthwhile investment.

I know there have been numerous discussions on this board about “cheap being cheap for a reason,” but I want to stress that I do not view Opera as a value investment – it’s a growth play that just also happens to appear attractive from a valuation perspective, too. The Internet figures to become more indispensable with each passing year, so Opera has macroeconomic tailwinds in its corner. I see this continued growth in users as the strongest harbinger of Opera’s success: the more users they end up with each year, the more revenue potential the company has. Truth be told, Opera only needs to end up with a fraction of new users to significantly accelerate its overall revenue. The limited economic development of the areas in which Opera operates most heavily also serves as a boon, since the potential of browser-adjacent businesses is likely higher in these places than in more mature Internet economies.

And lest I forget, Opera has already achieved profitability! Management has been very clear that they will continue to invest heavily to capture new growth opportunities, but it’s comforting to know that there is already a track record of black bottom lines.

All in all, I think Opera has a strong brand identity, a convincing track record, and plenty of minimally tapped revenue streams. After earnings yesterday morning, I opened a 1.5% starter position, with the intent to increase my holdings as I learn more.


Admittedly, this is my first time analyzing a company to this level of depth, so it could very well be that there are glaring gaps in my analysis. If they exist, I’m sure the astute minds that populate this board will point them out! I welcome any and all counterpoints, as well as constructive feedback. Please let me know how I can do a better job in the future!

Nick

P.S. I just want to say a quick word of thanks to Saul and all of the board’s contributors. I discovered this board 3 years ago, when I was all of 24 years old – quite the tender age to learn the most valuable financial lessons of my life! Hyper-growth investing has radically reoriented my career trajectory, and for the better. Instead of working to ensure my financial security, I can focus my efforts shaping a more just and equitable world, a privilege for which I’m extremely grateful. In the next few years, I aim to transition out of test prep and into Effective Altruism, a data-driven field focused on the most efficient use of philanthropic capital. And I can say with emphatic confidence that this transition would not have felt possible were it not for the knowledge and wisdom acquired on this board. Thanks for the blessing!

(For those interested in learning about EA, read more here: https://www.effectivealtruism.org/articles/introduction-to-e…)

67 Likes

I like Opera’s built in VPN, but there’s so many great browsers out there and a ton between them and the well known ones.

I’ll reinstall it and see how it feels compared to last year, before I switched to Brave browse, which I think is the best for speed, privacy, and ads.

I’ll do some more digging around. Thanks for reminding me about them.

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So imagine my surprise when I learned that there’s a browser out there growing like a weed!

With a 1.35% market share compared to Chrome at 68.06%, it has a lot of growing to do.
https://netmarketshare.com/browser-market-share.aspx?options…

Taken together, these two initiatives have eye-popping growth Y-o-Y, from $5 million in Q1 2019 to $94.7 million in Q1 2020

Which is a high percentage growth, but then $5M is essentially nothing.

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Licensing their optimized Opera browser(s) for specialized platforms could be a huge deal.

Opera has been around for a long-time, but never achieved mainstream. Tech people liked it as a browser. However, the revenue growth is impressive…

but its in the OMG-way-too-hard basket for me. I can (more or less) stomach Class A/Class B share classes, that seems to be normalised nowadays, but when I see a corporate structure as complicate as Opera for an entity that seems very simple, I’m out.

18 different wholly owned subsidiaries? And I’m also very wary of Chinese-owned companies and also ADRs. Does the Holding Foreign Companies Accountable Act impact them?

"https://www.marketwatch.com/story/senate-could-vote-on-bill-…

It might also be “island-ist” but if I see “Incorporated in the Cayman Islands”, I’m also out.

Finally, I get offering a browser, but I don’t understand the coupling with Fintech for Kenya. How do you sit in an office in (Norway?) and go “you know how we do the Opera browser? How about we use our browser knowledge and… er… do micro-lending in Kenya?” Huh?

Now the company might do really well, but all of that is enough to keep me out.

Good luck!

cheers
Greg

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Opera was a well known browser 15+ years ago.
It has a very low market share for a very, very long time. You can check that here: https://gs.statcounter.com/browser-market-share
I think you can ignore the browser-business at all. It’s about fintech.

The main thesis is all about their lending business - microloans in emerging markets via their Apps like Okash. Most of their revenue comes from these fintech apps.

A few red flags for me:

  1. Weird company structure - Opera got bought by a chinese investor some time ago. CEO, Yahui Zhou, is barely visible on their website, IR, press releases etc. Almost like he doesn’t want to be seen. That it is run by a management team from china is already enough for me, not to invest.

  2. From Wikipedia “[…] most of Opera’s lending business is operated through apps offered on Google’s Play Store. In August [2019], Google tightened rules to curtail predatory lending and, as a result, Opera’s apps are now in black and white violation of numerous Google rules,” and that the company’s “entire line of business is at risk of disappearing or being severely curtailed when Google notices,” as well as the fact that “instead of disclosing to investors that its “high-growth” microfinance segment could be imperiled by these new rules, Opera instead immediately raised $82 million in a secondary offering without disclosing Google’s changes to investors.” Opera Software’s CEO and Chairman, Zhou Yahui, was also recently affiliated with Qudian, a Chinese firm also involved in loans, which saw its US stock plummet after accusations of fraud and illegal lending practices.[…]"

  3. I don’t think this company is such a “secret” that it can be so much undervalued. The market has to know something, or it just has the same doubts as I have. The chart looks like it could be from a cannabis company.

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The browser revenue is immaterial. Their revenue is coming from “micro-financing” (short term lending - and perhaps abusive lending). Lots of initial red flags. I may look closer later.

Thanks for bringing to board though.

Mike

I know Opera very well.

I had a friend that worked there for a while and I negotiated a partnership with Opera Media Works, their ad tech division that was spun-off as Otello Corporation a few years ago.
https://www.otellocorp.com/

Everyone I know in Silicon Valley stopped taking this company seriously when they sold to a group of Chinese investors. The founder, who was the soul of the company, cashed out in that transaction. If he was there still, this might be interesting. The browser division survives as it works well on low power mobile phones that are still popular in Africa. They had a set-top box TV division and a bunch of other stuff.

I found this on Wikipedia:
In September 2019, the company reported that nearly $56.4M of its revenue was made from their Fintech business area,[34] which now comprises over 42% of its total revenue, after its combined browser market share fell around 30% since its IPO in mid-2018. In January 2020, Hindenburg Research, a forensic financial research organisation, revealed that this is mainly related to predatory short-term loan products in Kenya, India, and Nigeria…Opera Software’s CEO and Chairman, Zhou Yahui, was also recently affiliated with Qudian, a Chinese firm also involved in loans, which saw its US stock plummet after accusations of fraud and illegal lending practices
https://en.wikipedia.org/wiki/Opera_Software

I wouldn’t go near this as an investment personally.

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Hi Nick! Thanks for accepting my challenge and bringing a company to the board! I have a few random thoughts in the way of feedback:

  1. Gross Margin is crucial when evaluating a company. It tells you what kind of company you’re looking at, and what type of valuation is reasonble. Opera doesn’t make it easy, because the loan loss expense muddies the picture, but I challenge you to look at this in as many ways as you can, and report back to us.

  2. Opera’s fintech business accounted for 69% of revenue in the quarter just reported. As you said it was just $5m in the YoY quarter…and now it’s a majority of the business. This should spark several questions:

  • why has it grown so much? how sustainable is this rapid growth?
  • is this lending risky? do we know yet?
  • what are the unit economics? what’s the gross margin on this revenue?
  • and many more
  1. You said COVID-19 has naturally had an impact on Opera’s willingness to loan, but according to the most recent earnings call, management expects only mild short-term headwinds here.

Not sure what gave you that impression. Everything I saw in the CC made it sound severe. They basically stopped lending for the short term: we elected to proactively and meaningfully reduce the issuance of new microloans as of mid-March to reduce our credit exposure as our key markets experienced government-mandated lockdowns. This has meant that there has been very little loan activity quarter-to-date, and this will lead to materially lower revenue in the second quarter versus the first quarter.

New Challenge: I would love to see you do a second wave of research here and come back with a response to my post here, and others who have responded to your write up. Again, thanks for bringing this. I promise you’ll learn from it, and maybe we all will!

Bear

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