Evolution AB Stock Analysis & Deep Dive

A live gaming operator from Sweden

Update Q3/2023 (29.10.2023)

Evolution continues to show strong numbers. Q3 sales grew 19.6% YoY and EPS grew 23%. In the comparable Jan-Sep period, sales grew by 26% and EPS by 27%. The strongest growth was in Asia at 35% and Latin America at 39%. Europe grew by 10%.

In the live casino business, customer demand exceeds supply. It takes about 18 months to set up a new studio, and in addition, there are currently problems in hiring new croupiers. In Colombia, a studio was opened in Q3 and another in Europe is to follow this year. A total of 4 new studios are planned for next year.

RNG revenues are down 2% compared to Q3/22. Given the nearly 3Bn invested in acquisitions in this sector in recent years, one must wonder what management was thinking. With now almost 2.3Bn in goodwill at a market cap of $17.6 billion, a lot of money seems to have flowed into overvalued companies.

In the conference call an evasive answer was given to the question about share buybacks. With currently 800m cash on the balance sheet, I think something should happen here.

With an EV/FCF of 16.4 Evolution is now priced even more attractive than before due to the drop in share price as a reaction to the Q3 numbers.

Intro

You don’t come across a company that grew its revenue in the last years by 49%, 53%, 90% and 36%. When you do however, it makes sense to dig a bit deeper and see if there might be an investment jewel hidden.

At first, I thought, that Evolution was just offering basic gambling but I was surprised by the sophisticated live gaming component. Read on to learn more about a 20bn market cap company from Sweden that you’ve probably never heard of.

The Company

Evolution was founded in 2006 and develops, produces, markets, and licenses fully integrated B2B Online Casino solutions to gaming operators. More than 700 online casino operators rely on Evolution. The largest customer contributes 14% of the revenue and the top 5 contribute 30% in total. Evolution employs over 17400 people in studios across Europe and North America and has more than 1300 live tables.

The Industry

Gaming is still a growing business. The global gaming market (lottery, casinos, and gaming machines) was €438bn in 2022, of which 23% were online. Online gaming has shown tremendous growth with a CAGR of 19% in the past five years, compared to 2% for the overall market. The global casino market is split into 80% land-based, 15% RNG, and only 5% live casino.

The Business

Evolution provides fully integrated live casino solutions to a gaming operator (B2B), who then markets his product to the end consumer (B2C). The gaming operator must provide services such as user authentication and player account management.

The majority of Evolution’s revenues consist of commission fees and fixed fees for dedicated tables, which are paid monthly by operators. The commission is calculated as a percentage of the operators’ winnings generated via the company’s Live Casino offering. Since the growth of land-based casinos is naturally limited, some of these casinos seek to expand their market by offering online gaming. Evolution tries to be the partner of choice for these casinos. With the implementation of a one-stop-shop (OSS), Evolution offers customers full access to the whole portfolio of games with a single integration into their back end.

Evolution has a strong presence in regulated markets and aims to be the first live casino in those markets. Evolution is active in markets such as the US, Canada, Italy, Spain, Belgium, and many more.

Evolution offers its products through four brands: NetEnt, Red Tiger, Big Time Gaming, and Nolimit City.

Evolution offers RNG games(Random number generator, a short term for an algorithm that produces random numbers) and live games, which are streamed from a studio similar to a TV studio. Customers have the option to book dedicated tables for their games, which can be fully branded and customized based on the operator’s wishes. The end customer can access the games through all platforms. Mobile revenue made up the lion's share of Evolution’s revenue with 68%.

Europe and the UK make up 43%, Asia 33% and North America 13% of the revenue. The core of the offering is well-known games, such as Roulette, Baccarat, and Blackjack.

In 2022 Evolution introduced a new smart lobby for players, which follows the idea of Netflix: Players are presented with a wide choice of games to play, and based on their past playing history, the lobby shows similar games. This personalized lobby makes it easier to lure players into new games. The goal for 2023 is to launch 100 new games to offer players an even broader choice.

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Live Gaming

Live gaming is the main revenue contributor and also a lot faster growing than RNG. With 81% of the revenue and a growth of 42% compared to the previous year, it shows strong momentum.

The game presenters of Evolution need to finish a 100-hour training course before they embark on a three-month-long trainee period to ensure the proper skill set to present the games. Evolution has its own workshop in Riga, Latvia to produce the equipment necessary for the studios. To give you an idea of what the live studios look like:

Here are some more examples of live games. I can believe, that it is a lot more interesting for potential players to interact with a real human, compared to a random AI bot. These game presenters create a real-world casino-like feeling, even though you might be sitting at home or riding the bus while playing a round.

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