Evolution Gaming: A Safe Bet Here
Words To Live By
My momma always says, “Buy the best and cry once.” Warren Buffett always says, “Buy a great company at a good price, rather than a good company at a great price.”
The two thought processes are relatively similar. Buy the best, avoid bad purchases, even if the bad purchases are cheaper, and do this simple process only once. The best part? I’d bet $100 my mom has no idea who Warren Buffett is and that she’s probably googling it now.
Evolution Gaming: The Greatest Gambling Stock
I have been watching the gambling space for a long time. Penn National ($PENN), the owner of Barstool Sports, has always been my favorite name. I feel like their brand and superior marketing will lead to higher ROI over other names, like DraftKings ($DKNG). No other company really had my prolonged interest within the industry.
Then, I discovered Evolution Gaming ($EVO/$EVVTY). It took me a few months, but I finally bought stock in early October. Following my initial purchase, Evolution posted these crazy results and the shares DROPPED!
$EVVTY $EVO
These might be some of the craziest numbers I have ever seen!
97% revenue growth Y/Y
113% EBITDA growth Y/Y
EBITDA margin at 69.9% (64.8)
Net income margin, 57%
Diluted share count up to 223 mm from 187 mm
Shares down 7% in response, weird pic.twitter.com/3xwhAjwpNB— Fundasy (@FundasyInvestor) October 28, 2021
After tweeting this, I realized this was my next post. I always try to give my subscribers 4 things:
The best companies
A good entry prices
Entertaining content
Superior returns
And with the shares finally dropping to an attractive entry price, here is your post over Evolution Gaming! Also, here’s a subscription box for my free newsletter! I don’t know how that got there…
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The Industry: Live Casinos
The first question, what are Live Casinos? Live Casinos are, “Live casinos are a relatively new form of online gambling, which represents the action that takes place in traditional casino venues. However, the player is able to place a wager from the comfort of their home” -Casino News Daily.
This is basically a degenerate’s dream. They can gamble, look at pretty women, and lose their child’s college savings all from the comfort of their couch! From a business perspective though, this is a unexpectedly difficult business. The Live Casino operators need a lot of factors all working together seamlessly:
Large access to initial capital to build games
The software enabling the game
The production studios used to produce the experience
The hardware needed to run these operations at scale
Individual customer optimizations: color schemes, logos, professional dealers, branded uniforms, etc.
Evolution Gaming ($EVO/$EVVTY)
The Swedish company was founded in 2006. Today, Evolution is the leading business to business (B2B) provider of live casino systems! The company develops, produces, markets, and licenses fully integrated Live Casinos.
Evolution is providing the next development of casinos you could say!
Gosh, I hate myself. Anyways, Evolution makes money by licensing their games to either online casinos or land-based casinos. However, the majority of their revenue comes from a commission based structure and providing add-on services, like dedicated tables (VIP tables).
This investment would largely be a bet that the live casino will continue to grow its market share. Which is a reasonable bet because live casinos grew in market size by around 38% per year from 2015-2019. Furthermore, there are a lot of tailwinds going forward with countries like the US legalizing gambling and people spending more time on mobile devices.
The Financials: Growth & Valuation
This might be a controversial statement but… I’ve never seen a company that is growing its revenue as quickly as Evolution while simultaneously growing its profitability to this level.
Look at this picture!
Things to note here:
Revenue is growing fast
Operating expenses are not growing as fast as the top line -> operating leverage
Earnings & Free Cash Flow are following revenue and the margins are growing
Last quarter had a 57% net income margin! That’s higher than Joe Rogan!!
Revenue is in Euros. Multiply total by 1.15 to get to the one true currency, USD
And… that’s about it
If you prefer numbers, here you go!
Things to note for numbers people:
Revenue growing >45% on average since 2015
Numbers are in Euros again because screw Morningstar.com
Share issuance only growing on average less than 3% since 2015. Current diluted share count around 225 million (not on the table)
Operating margin is growing. Currently it’s at 58.7%
Annual dividend has grown from 9 cents to 68 cents per share, and it’s very well covered by profits
In addition, the company is spending less and less in capital expenditures each quarter!
Evolution $EVO is an amazing business in many ways — margins, growth, etc. Also, it has enjoyed a remarkable trend on capital intensity… (Disc:long) pic.twitter.com/radEEDAEtG
— Chris Mayer (@chriswmayer) October 29, 2021
If you were to summarize this section, the company has managed to grow its revenues and profits extremely quickly while not diluting shareholders. Also, expenses are dropping as a percentage of revenue over time.
A Global Business
Today, Evolution Gaming is operating on a global scale. They have a mature European market and are expanding to new markets like North America and Asia.
I will say, I am a fan when a company with a scalable business model starts takes their operations global. Something to note here, Asia and North America are growing rapidly. Personally, I would expect this trend to continue in the next 12 months, because the company just went live in Michigan and Ontario and is currently working on going live in Connecticut.
Valuation: Valuation Compression
The company I would say has done moderately well the past 5 years. The NASDAQ is in yellow for comparison.
Evolution is up 2700% in five years. My last article over Domino’s ($DPZ) showed us Domino’s was up 2400% (with dividends reinvested) over 10 years!
The past 6 months though, Evolution has not done that well.
Valuation Compression
This has been one of my favorite terms lately. Basically, it’s when a stock’s valuation (how expensive it is, based on revenue/earnings, etc) starts to drop or compress while the company is still growing at the same rate.
Things to note:
April 21: The company was trading at around 95x Last Twelve Months (LTM) EBITDA
Today: The company trades around 47.5x LTM EBITDA
The last time the stock traded this low was Nov 2020
The stock has gone up over 120% since November 2020, while trading at the same valuation
For people who have no idea what this means… here’s a poorly formulated analogy:
Valuation compression is like a spring under tension. If the company is consistently executing and the stock price is dropping/staying the same, the price will start to “compress.” This means that either you can easily let up on spring and it will move upwards, or you can keep pressing the spring down and the spring will eventually launch in the air.
Fast or slow, the spring is going to move back to where it belongs. The longer it takes though, the more explosive the move will be.
(Your potential judgement of my watermark pictures means nothing to me. I write these posts for free)
If Evolution keeps growing profits, the stock will eventually follow those profits. That’s why I feel like this is a good entry here.
Current Valuation (According to koyfin.com):
Price to Sales:
Last Twelve Month: 30.8
Next Twelve Month: 22.3
Price to Earnings:
Last Twelve Month: 57.4x
Next Twelve Month: 38.4
Price to EBITDA:
Last Twelve Month: 47.6x
Next Twelve Month: 31.8x
Competition
I think Evolution Gaming has significant competition: MGM, Penn National, DraftKings, FanDuel, Coinbase (basically gambling) etc.
Currently, Evolution is the leader though. Any new entrant into Live Casinos needs to have experience in casinos, technology, and operations. Then, they need to build a BETTER game than Evolution to convince customers to switch, which would be hard given Evolution’s lead in products and customer’s data.
I personally cannot verbalize this concept better than Evolution’s Chief Product Officer, Todd Haushalter. If you want a better answer than I can give, I would read his comments over Evolution’s moat!
$EVO `s CPO Todd Haushalter on $EVO `s moat (Tip: Possible to read "transcript" https://t.co/pvUt0Db4U3 pic.twitter.com/Kht384jYcb
— OrakelO (@Orakel_O) October 19, 2021
A Short Thesis
If I were to write down a summary of my thesis points, this would be it:
Fast growing top line with tailwinds for 10+ years with international expansion, shift to online gambling, new products, and expansion with existing customers
Competent and shareholder friendly management
Extremely profitable and margins are still increasing
Great moat with experience in technology, casino operations, good customer engagement, and studio productions
It’s a relatively good price here for a great company. AKA: “Buy once, cry once”
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Final word: Do your own due diligence. If you’re based in the US, you should purchase the OTC shares, $EVVTY. This is not investment advice. This is for fun. I do own shares. Yatta yatta yatta.
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