AI Features And Marketing Efforts Will Boost User Engagement And Market Position

Key Takeaways

• Growth in Western markets, product innovation, and enhanced user engagement are driving potential increases in revenue and ARPU.
  
• Advanced AI features and strategic marketing efforts are expected to boost Opera's advertising efficiency, bolstering earnings and margins.
  
• Overdependence on advertising and specific growth regions, combined with ambitious AI investments, creates risks if market dynamics shift or if economic downturns occur.

Catalysts

Provides mobile and PC web browsers and related products and services in Norway and internationally.

• Opera's focus on high-value regions and user growth in Western markets, combined with innovative product updates and increased user stickiness, is expected to drive higher revenues and ARPU in the future.
  
• The significant growth in advertising revenue, particularly within Opera Ads and its e-commerce opportunities, is anticipated to continue, improving overall revenue and profitability.
  
• The introduction of AI features and agentic browsing capabilities positions Opera to differentiate in the browser market, aiming to enhance user engagement and potentially boost revenue.
  
• Opera's strategic expansions in Western markets and elevated marketing efforts are generating a flywheel effect that is anticipated to further boost user acquisition and revenue growth, positively impacting net margins.
  
• Continued advancements in AI for Opera Ads, leveraging proprietary algorithms and data centers, are designed to enhance advertising efficiency and effectiveness, translating into improved earnings and EBITDA margins.

Opera Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Opera's revenue will grow by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $145.6 million (and earnings per share of $2.63) by about March 2028, up from $80.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $160.3 million in earnings, and the most bearish expecting $130.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 18.7x today. This future PE is lower than the current PE for the US Software industry at 31.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Opera Future Earnings Per Share Growth

Risks

• The company's reliance on advertising revenue from e-commerce opportunities could present risks if market dynamics change or if e-commerce growth slows, potentially impacting Opera's future revenue growth.
  
• The substantial increase in marketing spending to drive user growth and engagement, while effective, might not sustain the same return on investment over time, potentially affecting net margins if costs become disproportionate to revenue.
  
• The company's significant growth in Western markets contributes to audience extension and higher ARPU, but overdependence on a few regions or major e-commerce partners could create risk if these growth areas face economic downturns, impacting overall earnings.
  
• Opera's ambitious investment in AI and new browser features, although positioned for differentiation, could face execution risks or fail to achieve expected user adoption, impacting revenue from both current operations and new ventures.
  
• While search revenue growth has been relatively stable, its slower pace compared to advertising indicates a potential vulnerability to shifts in user behavior or competition, which could affect the balance of revenues and create pressure on overall profitability.

Valuation

• The analysts have a consensus price target of $26.143 for Opera based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $757.8 million, earnings will come to $145.6 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $17.04, the analyst price target of $26.14 is 34.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.