To The Moon

$Evolution AB(EVVTY)$

Good day, fellow Tiger Evolution enthusiasts. Evolution Gaming stock has been one of the most requested topics for me to analyze over the past few years. I’ve received countless emails and inquiries about this online gambling software maker. While it’s not typically the kind of business I focus on, as Howard Marks often says: It’s not what you buy; it’s what you pay that counts.

Good investing isn’t just about purchasing quality assets—it’s about buying them at the right price. No asset is so exceptional that it can’t become overpriced and risky, nor is any asset so flawed that it can’t become a bargain at the right price.

With Evolution AB now more than 60% below its 2021 peak, is it a bargain? The answer appears to be yes—it looks like an investment capable of delivering solid returns. However, you’ll need to understand its business model and how it fits into your portfolio. Notably, the stock is also traded in the U.S. as an ADR, with around 40% of its ownership from American investors, including major players like BlackRock and Vanguard.

Business Overview

Evolution develops, produces, markets, and licenses fully integrated B2B online casino solutions for gaming operators. The company has seen rapid growth over the years, serving more than 600 operators, including many top-tier online operators and land-based casinos transitioning online.

Although I’m not personally familiar with gambling, this business might resonate with some of you. Evolution is active in the fastest-growing segment of online casinos, which has seen an annual growth rate of 38% over the first five years, accelerating during the pandemic.

Their business model is straightforward: the end user interacts with the gaming operator, while Evolution provides the backend systems and services at scale. Evolution takes a 15% fee, with agreements ranging from generic table access and streaming to dedicated tables, VIP services, and native-speaking dealers.

Recent Highlights

From their annual report, key takeaways include:

• Launching 110 new games.

• Building new studios, including one in the Philippines.

• Continued market expansion and innovation.

• A strong dividend yield of nearly 4%, expected to grow alongside the business.

Growth and Market Leadership

Evolution’s medium- to long-term objectives include sustaining dividend growth and maintaining their leadership in the live casino market, where they currently hold about 40% market share. Although growth slowed from 90% in 2021 to 23% in 2023, they’re still scaling their operations, investing around $100 million annually to strengthen their market position.

They’ve built a global network of studios, employing over 20,000 people and offering a comprehensive, one-stop solution for operators. However, customer dependency presents a risk, with their top 1–5 customers accounting for 41% of their business. While this could make them vulnerable, their large margins and strong position should help mitigate these risks.

Fundamental Analysis

The stock’s decline can largely be attributed to a normalization of growth rates. Revenue growth of 90% in 2021 has now stabilized in the high teens. The market often overreacts to such changes, assuming high growth will continue indefinitely before recalibrating to more sustainable levels.

When evaluating whether a stock is worth buying, it’s essential to consider trends like market growth, business quality, and overall value. These factors collectively determine if an asset is a good investment. From my perspective, Evolution Gaming's current stock price appears to be below trend.

The market capitalization stands at 177 billion SEK, approximately 15 billion EUR. The P/E ratio is 13.54, and the dividend yield is nearing 4%. During the pandemic in 2020, Evolution made a strategic acquisition worth 2 billion EUR, reflected as goodwill on their balance sheet. This acquisition contributed to their rapid growth, with revenues spiking during the pandemic. While growth has since slowed, the company has consistently expanded over the last decade, and the market is projected to grow further.

According to Polaris, the market could grow by 12% annually through 2030, while Statista predicts a more conservative 5% annual growth rate for online betting and casinos. A blended growth rate of about 8% seems reasonable, which, alongside inflation and user penetration growth, suggests a long-term upward trend. For instance, Canada already boasts a 74% user penetration rate. If Evolution grows at market averages, their dividend is likely to increase correspondingly, offering a potential 12% long-term return at current valuations.

Risks and Challenges

Despite these positives, there are risks:

• Growth Slowdown: After an exceptional 90% growth in 2021, rates have normalized to the mid-20% range.

• Regulatory Scrutiny: Evolution is under review by gambling commissions. However, only 3% of revenue comes from the UK market, so the impact might be limited.

• Operational Challenges: Strikes in Georgia involving 300 of their 7,000–8,000 workers caused temporary disruptions. The company maintains that the majority of staff remain operational and happy, but such events highlight the complexities of managing a global workforce.

• Cybersecurity: Evolution has faced cyberattacks, particularly in Asia, where content theft has been reported. Although these attacks slow down operations, Evolution believes they can regain their growth patterns within a few quarters.

Business Strengths

Evolution remains profitable and cash-rich:

• Revenue for the recent quarter stood at 500 million EUR, with an operating profit margin of around 75%.

• These strong profits enable reinvestment and consistent dividend payments.

Geographic and Market Insights

Asia has emerged as a significant growth region, while Europe and North America contribute steadily. The company operates in regulated markets, which account for 40% of its business, helping mitigate some regulatory risks. Expansion continues, with new studios being established in Brazil, the Czech Republic, and the Philippines. They’re also innovating by integrating streamers and influencers into their gaming solutions, which could open new revenue streams.

Outlook and Conclusion

Evolution expects 20% annual growth moving forward, driven by new products, studios, and continued market leadership. While risks like strikes, cyberattacks, and regulatory challenges persist, the fundamentals remain strong. For investors comfortable with a 12% projected return, Evolution could be a compelling option.

However, it’s important to consider whether this aligns with your personal values and investment strategy. For me, sectors like insurance, banks, tobacco, arms, and gambling don’t fit my portfolio preferences. I wouldn’t feel comfortable owning this stock, but my goal here is to provide you with a balanced view of its risks and rewards.

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