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/$EVVTY). It took me a few months, but I finally bought stock in early October. Following my initial purchase, Evolution posted these crazy results and the shares DROPPED!
After tweeting this, I realized this was my next post. I always try to give my subscribers 4 things:
- The best companies
- A good entry prices
- Entertaining content
- Superior returns
And with the shares finally dropping to an attractive entry price, here is your post over Evolution Gaming! Also, here’s a subscription box for my free newsletter! I don’t know how that got there…
The Industry: Live Casinos
The first question, what are Live Casinos? Live Casinos are, “Live casinos are a relatively new form of online gambling, which represents the action that takes place in traditional casino venues. However, the player is able to place a wager from the comfort of their home” -Casino News Daily.
This is basically a degenerate’s dream. They can gamble, look at pretty women, and lose their child’s college savings all from the comfort of their couch! From a business perspective though, this is a unexpectedly difficult business. The Live Casino operators need a lot of factors all working together seamlessly:
- Large access to initial capital to build games
- The software enabling the game
- The production studios used to produce the experience
- The hardware needed to run these operations at scale
- Individual customer optimizations: color schemes, logos, professional dealers, branded uniforms, etc.
Evolution Gaming ($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!
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!
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”
And if you made it this far, thank you so much for reading! If you want more content like this then consider subscribing to my newsletter.
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.
Great write-up. As shown via the inserted tweet Chris Mayer (author of 100-baggers) is a holder. I like the point about valuation compression too, this is backed up by various target estimates, the average of which is 24% higher than todays price. It’s a very solid long term hold, and the company has huge determination to be the very best.
Thanks again for the write up.
Thanks for the comment FT! This is definitely one I’ve been wanting to be a shareholder of for a while, and I’m happy the opportunity finally presented itself.
The Price/EBITDA being cut in half in 6 months when the stock is only down 20% is also absurd! Looking forward to the years ahead with this name
Best analysis yet on this star company!
Thank you so much Jamal! This was one of those few instances were the more research I did, the more I liked the company!
Great entry here for long-term investors. Looking forward to holding this one for the next few years
Yes I’ve been holding this for the last couple of months but was shocked when the price actually dropped even after those stupendous results ! But confident on the long term prospects
Thank you so much for your comment!
*Apparently* revenue missed analysts estimates by 2%. Personally, I’m okay with 97% revenue growth instead of 99% though and that’s just me!
Definitely one of those times were the market is acting very irrational! This provides us long-term investors opportunities though
Unleash the spring! After I build my full position of course.
If(valuation == good), Then (Force = k*Distance (k=mx) –> 2x$$), Else (Wait)
Figure that one out, you fancy ISEN major