Intro
Yo! Welcome back to the blog. Today I am gonna have a write up of one of my favourite companies, that I also have in my current porfolio (quite a hefty amount). EVO is one of those companies, that you would just love to own more of, if the price would just fall to the right amount..!
You can find them on a swedish exchange. I did open my position last year (end of 2023) and have been adding it at a few opportune moments, the last time I added was around 9 weeks ago bumping it up by 300%. Today I estimate it to be around 10-15% of my portfolio.
We will get into the competetive edge, the market, the numbers, the competitors and the valuation as per usual.
Summary
Evolution does live casino, casino games and some RNG stuff on the side (imo their strength lies in the former not the latter). They are a global force, Asia, Usa, Europe etc, geographically diversified so to say. They provide other online gambling providers with both the services and products they need to operate and provide for their own customers. They are strictly B2B and their core business is providing live casino and casino games.
The investment thesis is as usual with my investment style, high quality for reasonable prices.
Numbers and Valuation
They have historically grown at 25%+ revenue, have 70%+ profit marginals and own a healthy 50%+ market share in their space. Did I mention ROE at 30%? With nutty numbers like this, the question moves from, “will they grow” to “how much will they grow” and then towards “how much should I pay for that growth?”.
Doing some simple math, it is quite easy to discount that having a business returning 20% on equity, growing revenue at 15+%, has incredible margins because of a tech driven, asset light business model and has a healthy amount of buybacks and dividend, deserves to go for a pretty hefty price. I got lucky, to buy this incredible business at P/E 18, today I think it trades at around 22 or 24.
I do think that even paying P/E 30, since earnings are set to grow dramatically if the business can flow, because of revenue conversion being higher than normal, is not even that far fetched. The problem with that, is that you loose the margin of safety, so it is more a question of risk and in turn then a question of returns and wether better risk adjusted returns can be found elsewhere. But personally, I think P/E 30, is the absolute limit. While I think you would be fine you also would not be doing great. And anything below 20, seems extremely decent. It’s a really simplistic valuation model I am using in this case, but honestly, when a company is this strong the math is not really that hard to crack to make good returns. Which is good. Easy case, easy math, easy investment, easy returns. And that would mean, easy life.
Market
Anyway, online casino is growing and are set to cannibalize on landbased casino. Online will never be the exactly the same as on site, but surely most of it will move online as the coming generations are further and further digitalized.
Digitalization is one of those super-mega-giga-trends that have been at play for 20+ years and I believe it will continue for another 20+ years. Tech does not stop, tech does not stop invading our lives and tech probably won’t stop, as long as we do not have some kind of spiritual revolution denouncing AI and materialism. And.. Yeah. What are the odds of that really?
So today, landbased casinos account for 80%, live casino 5% and RNG 15,5%. (RNG is like slots, random number generation, google it if unsure.) Live casino has grown for a staggering 21,5% CAGR the last 5-10 years, and is going to continue in that pace. (Even if it only continues at half that pace, I am still content.) Landbased casino on the other hand is loosing at a CAGR of -5% a year. This is cannibalization. And I am here for it, I am here to ride that wave for as long as I can.
Competitors and Competetive Advantages
As long as Evo does not let competitors onto the scene, they can enjoy a good healthy monopoly (as in healthy for shareholders). But even given that 2-3 competitors also decide to enter this lucrative scene, the space is going to be big enough to allow for that anyway, AND STILL generate substantial returns for all parties involved.
Anyway, there are a lot of major competetive advantages that EVO has. Riding a megawave called digitalization, existing in and dominating a growing market, and facing few serious challenges that could impede their competetive edge permanently (since their edge is really riding a big ass wave and being in the right place).
But if you want even more advantages and more numbers supporting their superiority to their competitors, I can supply you with jso1123’s write up from Value Investors Club (VIC). Since he already did that work, it seemed unecessary for me to do it again, so I am just going to add it here for my readers. I did fact check all of this information, but in general VIC is operated by professional investors (the 5% that are good at their jobs) so there are rarely faults in numbers (although there are plenty of bad takes still). Enjoy.
jso1123’s write up:
1. EVO’s significant scale (4-10x+ larger than their nearest competitors enabling significantly higher R&D spending on game creation and tech development) creates a flywheel effect of product innovation that is difficult for competitors to match (EVO is releasing 100+ games in 2023 vs. its nearest competitor Playtech 20-25; new game releases drive player activity). Because EVO has so many resources, it can test and perfect its games more than anyone else, which enables the Company to have the best and most entertaining games that generate the highest player volumes and in turn the most revenue for operator customers. This is best evidenced by the average revenue generated per game of EVO vs. peers; talking directly to peers Playtech and Pragmatic Play, they admit EVO generates 2-3x or more revenue per game on a like-for-like basis on average (there isn’t one thing we can point to for why; it’s a combination of 50+ “small details” that all add up to a better game and player experience; we recommend talking to formers to understand this point).
2. The unit economics of the industry supports a winner-take-most structure, which reduces the risk of competitive encroachment. EVO typically charges operator customers a 10-15% take rate on GGR; a competitor looking to gain share can come in and offer a 50% discount, or a 7.5% take rate (or more if they wanted), but unless that competitor’s games can generate at least 85% of the revenue per game that EVO can generate, the operator would make less money, so is instead incentivized to stay with Evolution despite the higher take rate (e.g. the math is if EVO can generate $100 of GGR on a game less 15% EVO take rate = $85 of net gaming revenue to the operator, since competitors can only generate the equivalent of $33-50 of revenue per game on average across their portfolio relative to EVO due to the inferiority of their games, the operator would make only $31-46 of NGR by favoring a competitor’s game placement over EVO’s, not even close to what EVO can bring in). Competitive advantage point 1 makes it hard for competitors to generate enough revenue per game to overcome competitive advantage point 2, hence the reinforcing effect which we find attractive.
Alright thank you jso1123- Laztum taking over again.
So summarizing,
Evo is a high quality compounder, Johan bynelius and a couple of other superinvestor are in on it. And it has been written up twice on VIC. Good signs.
This is a company that definitely deserves a place on your watchlist, and if you can snap it up below 20, that’s a good idea. I definitely would (actually, I am literally going to).
Happy Hunting!
Laztum
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer’s securities.
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