What are your thoughts about a potential disruption via AI. I could imagine in the coming years an AI avatar become as realistic as a real human in combination with an LLM model. This could potentially reduce the cost to operate drastically and open up this market in such a way that scale is no longer an actual need in the igaming industry as it resides in the AI modelling world breaking the entry boundaries and allowing for massive competition. What moat would be left for this company?
That means a lot Ryan! Definitely put a lot of effort diagnosing the industry dynamics and am excited about the full year results being released Feb 1st.
Can I seek a clarification, how does evolution gaming achieve player density in this case? Is it:
1. A customer from any of the casino operators will be commingled on a same live casino table or
2. A customer from a casino operator will only be directed to dedicated table of the casino operator. If it is the latter, then the player volume will be dependent on the casino operator pool. If the operator has a small customer pool, player density will not be achieve? And the ROI on that table will be very low? Did I understand it correctly?
Thank you for the detailed write up. ROIC versus cost of capital is 16%. That's good, but I've seen better. Operating margins have steadily increased. Evo is now about a 20 billion euro company. Have you looked at their destination? How big could this company become?
ROIC did dip significantly from 2020, after the NetEnt acquisition. However, since bottoming at 12%, the Quarterly ROIC number has been ticking up each quarter and is now at 19%. Before the NetEnt acquisition, it was nearly 40-50% though, so I think you'll continue to see this efficiency metric ticking up over time as the Capital Invested number goes down.
The destination is tough. Today, iGaming/Online makes up about 5% of GGR. I think there's a possibility that grows as a percentage of GGR to 15-20% over the next decade or two and the entire market grows in-line with the money supply. Therefore, I do think this company has sufficient growth left, especially if it can efficiently translate 60% of revenue to cash like it has thus far.
Yes, ROIIC is sky high. Normally you'd expect competition (e.g. B2B) to show up and erode these margins away. Which could still happen (the business hasn't been in the limelight for long). You could argue EVO has an impenetrable moat that will prevent such a thing. But then I see a company like Pragmatic come out of nowhere and grow like weeds. That does make one wonder if EVO's margins will last. I think this is probably the one thing we should try to figure out as investors.
Pragmatic has found an interesting way to gain market share actually!
They use Twitch streamers with their products to refer new users and win big time to promote the games. However, this has come under a good amount of scrutiny from regulators recently.
It also is not very profitable because the big Twitch streamers are quite expensive. We will se how their strategy scales!
Oh thank you, that is so interesting... and reassuring, in a way. Another data point here is Ali Gündüz who found Pragmatic's game hosts more engaging than EVO's (based on a few samples). I also saw that Pragmatic boasts about their game hosts' personalities in advertising. (This may be what you referred to in your writeup.)
What are your thoughts about a potential disruption via AI. I could imagine in the coming years an AI avatar become as realistic as a real human in combination with an LLM model. This could potentially reduce the cost to operate drastically and open up this market in such a way that scale is no longer an actual need in the igaming industry as it resides in the AI modelling world breaking the entry boundaries and allowing for massive competition. What moat would be left for this company?
One of the best paper I've read these few months. Thank you!
That means a lot Ryan! Definitely put a lot of effort diagnosing the industry dynamics and am excited about the full year results being released Feb 1st.
Can I seek a clarification, how does evolution gaming achieve player density in this case? Is it:
1. A customer from any of the casino operators will be commingled on a same live casino table or
2. A customer from a casino operator will only be directed to dedicated table of the casino operator. If it is the latter, then the player volume will be dependent on the casino operator pool. If the operator has a small customer pool, player density will not be achieve? And the ROI on that table will be very low? Did I understand it correctly?
Great work man
Thank you for the detailed write up. ROIC versus cost of capital is 16%. That's good, but I've seen better. Operating margins have steadily increased. Evo is now about a 20 billion euro company. Have you looked at their destination? How big could this company become?
ROIC did dip significantly from 2020, after the NetEnt acquisition. However, since bottoming at 12%, the Quarterly ROIC number has been ticking up each quarter and is now at 19%. Before the NetEnt acquisition, it was nearly 40-50% though, so I think you'll continue to see this efficiency metric ticking up over time as the Capital Invested number goes down.
The destination is tough. Today, iGaming/Online makes up about 5% of GGR. I think there's a possibility that grows as a percentage of GGR to 15-20% over the next decade or two and the entire market grows in-line with the money supply. Therefore, I do think this company has sufficient growth left, especially if it can efficiently translate 60% of revenue to cash like it has thus far.
Yes, ROIIC is sky high. Normally you'd expect competition (e.g. B2B) to show up and erode these margins away. Which could still happen (the business hasn't been in the limelight for long). You could argue EVO has an impenetrable moat that will prevent such a thing. But then I see a company like Pragmatic come out of nowhere and grow like weeds. That does make one wonder if EVO's margins will last. I think this is probably the one thing we should try to figure out as investors.
Great writeup!
Pragmatic has found an interesting way to gain market share actually!
They use Twitch streamers with their products to refer new users and win big time to promote the games. However, this has come under a good amount of scrutiny from regulators recently.
It also is not very profitable because the big Twitch streamers are quite expensive. We will se how their strategy scales!
Oh thank you, that is so interesting... and reassuring, in a way. Another data point here is Ali Gündüz who found Pragmatic's game hosts more engaging than EVO's (based on a few samples). I also saw that Pragmatic boasts about their game hosts' personalities in advertising. (This may be what you referred to in your writeup.)
Thank you for the detailed reply!