Best Evolution Gaming Online Casinos
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Technical storage or access is required to create user profiles for sending advertisements, or to track users on a single website or across websites for similar marketing purposes. Evolution Gaming (OTCPK: EVVTY) [EVO] operates online casinos for gaming operators. Globe Live Casino and Random Number Generator [RNG] Casino are two areas of focus for Evo that have grown significantly as an industry since 2016. The live casino and RNG markets have grown at annual rates of 28.2% and 8.9% in the that order over the past five years, and I believe potential future growth will benefit Evo’s earnings. Also by focusing on expanding their game portfolio through organic and acquisition-related development, Evo could see new game users move towards their product line which could potentially drive more sales. As regulation continues to support the growth of online gaming in America, international expansion (outside of Europe) will be a key bull catalyst for gains in my view.
Evolution Gaming was founded in 2006 and is headquartered in Stockholm, Sweden. Evo develops, manufactures, markets and licenses fully integrated online casino solutions for gaming operators worldwide With a huge focus on operational excellence, Evo has grown its customer portfolio to 500 gaming operators by the end of 2020 after signing agreements with a dozen operators in the US last year (eg: BetMGM (MGM), Caesars Entertainment (CZR), Wynn Interactive Sports (WYNN)). I believe Evo has a very simplified revenue model due to its B2B structure. By charging commission fees to their live casinos and RNG, Evo receives a monthly commission check from gaming operators based on a percentage of the total winnings through the casinos.
I believe Evo’s focus on operational excellence has been key to its success in the past. In 2020, their system availability was 99.87% except for scheduled maintenance, which shows minimal loss to operators using their platform. Evo focuses heavily on compliance, striving to be the most reliable and transparent online casino provider. All Evo game presenters and shufflers go through 100+ hours of training in the Evolution Academy program. Through this program employees develop skills such as awareness of gambling addiction, law enforcement and money laundering.
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The online casino market has grown tremendously since 2016 with live casinos and RNG growing at a CAGR of 28.2% and 8.9% respectively. In 2020, the global online casino market grew 23% year on year with a valuation of $19.8 billion according to H2GC. Although the online casino market accounts for 20% of the total global casino market by the end of 2020, I believe that this segment will continue to grow compared to land-based casinos moving forward.
I believe the online gaming industry will continue to grow as newly regulated markets drive demand into new geographies. Recently, Evo was able to expand into Pennsylvania and Michigan because new regulations allowed them. Evo’s North American revenue grew from $1.3 million in 2017 to $44.9 million by the end of 2020 (CAGR 226%) in the US expansion.
With the total North American casino market estimated to be worth $58 billion in revenue, potential new states will shift more land-based casinos to online casinos in my opinion. At the end of 2020, it was estimated that online casinos made up only 5.5% of the total casino industry in North America. Given the minimal current segmented makeup and Evo’s lack of extensive licensing in the US, this industry is poised for long-term expansion in my opinion. Even if the market expands to 10% of 2020 industry revenue over the next few years, that would equate to $5.8 billion or 8.5x Evo’s revenue in 2020. With these potential changes, I think Evo has runway exceptional long-term growth in the US and other international markets.
I believe Evo will continue to gain market share in a potentially expanding industry through its product development.
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While many new games added to the product portfolio are developed organically by Evo, acquisitions also drive product and revenue growth. In December 2020, Evo purchased NetEnt, adding slots as a new vertical to its live casino platform. Since NetEnt has a very similar business model to Evo, I believe they will be able to cross-sell different games to their different customer bases to create synergy going forward. Evo said they aim to develop a series of NetEnt games to provide the ultimate player experience. With this goal, Evo has already explained that they are working on several joint projects and will release several jointly developed games in 2021.
By adding new games and acquiring new verticals in different gaming segments, I believe Evo will be able to rapidly grow top line revenue as demand from diverse customers and game users potentially increases.
I believe Evo’s position in the online casino industry has allowed them to generate incredible revenue growth, expanding margins and profitability metrics over time.
From 2015 – 2020, Evo’s top line grew at an annual rate of 49%, operating margin increased nearly 2x from 27.61% – 53.41%, and net income margin cut 50%. Since Evo’s business model relies primarily on operating costs without the actual cost of goods sold, they also operate with a 100% gross margin. Due to market expansion and product development potential, I believe that Evo’s revenue will reach 4,619.26 billion euros in 2025 with a net income margin close to 60%.
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Profitability and free cash flow growth metrics have also been great for Evo in the past, in my opinion.
Free cash flow growth has been excellent and as a percentage of total revenue is now astronomical in my opinion. I also believe that Return on Invested Capital [ROIC] and Return on Equity [ROE] are historically high and stable. In 2020, the new equity offering has been purchased by the initial investors at a value well above par value increasing the total equity as a result of the increase in additional paid-up capital. Because of this, profitability metrics appear to be down but I believe they will normalize over time as the company looks to invest new capital.
Using bear case multiples, base and bull P/E and EV/S for Evo, I created a 2025 price target based on my 2025 EPS and revenue forecasts.
EPS-based PTs are calculated by multiplying EPS of $16.28 [€13.57 * 1.2x exchange rate] by P/E multiples of 30x, 25x, and 20x. Estimated revenue-based PTs are calculated by multiplying revenue of $5.543 billion [€4.619 billion * 1.2x exchange rate] by EV/S multiples of 12.5x, 10.0x, and 7.5x minus net debt of -$147.25 million and dividing by I 2025 diluted shares outstanding 202.93 million. The % return and CAGR columns use a current share price of $140.25. CAGR using n=4.5 years.
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I believe that the valuation multiples I used in my price target will be supported by potential continued earnings growth and further potential for margin expansion.
Although Evo’s stock price has risen sharply over the past two years, I believe the move is justified. With the stock currently down ~25% from the highs set in April of this year, the current 253 day moving average, in my opinion, could be a good technical area to pick the situation.
Online casinos are still a relatively new industry with many jurisdictions not allowing them to operate. Although the new regulations may open up markets and present excellent earnings potential for companies, they rely on this fact to continue expanding geographically. A pause or even a slowdown in the newly regulated environment could derail growth expectations and, in my view, lead to multiple potential contractions for the existing fast-growing business.
As it is a young industry, the potential for new entrants can be high as companies can target the space. Especially as new jurisdictions become available to operate the industry, opportunities could potentially be presented to new businesses or existing players to make money. This presents a unique risk in my view because regulation can act as a bit of a double-edged sword: newly regulated jurisdictions can become newly consolidated.
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