AI And Ad-Tech Drive Growth Amid Shifting Margins And Regulatory Risks

Key Takeaways

• Opera's strategic focus on AI advancements and high ARPU user growth via advertising and Opera Ads platform is expected to significantly elevate its revenue.
  
• New product launches, including Opera GX, and active engagement in the Digital Markets Act processes are poised to expand Opera's user base and revenue opportunities.
  
• Dependence on high-tech for product innovation and targeted high ARPU user strategies in volatile markets introduces financial and regulatory risks affecting growth.

Catalysts

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

• Opera's focus on high ARPU user growth and broadening of monetization opportunities, especially in advertising through scalable partnerships, is set to drive its advertising revenue growth.
  
• Advancements in AI and the expansion of direct interactions between the browser and end users are expected to enhance Opera's ad-tech platform, Opera Ads, leading to increased revenue.
  
• The Digital Markets Act (DMA) momentum and Opera's active role in these processes signal potential further expansion in EU user adoption and smartphone default settings, likely impacting search and other revenue streams.
  
• Opera GX, the gaming browser's growth and ARPU increase, along with new product launches and collaborations, present significant revenue and user base expansion opportunities.
  
• Opera's innovative product developments, such as Opera One's redesign and the introduction of AI features, position it to capitalize on the shifts in the browser market, potentially increasing user engagement and revenue streams.

Assumptions

• Analysts are assuming Opera's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.1% today to 19.5% in 3 years time.
• Analysts expect earnings to reach $125.8 million (and earnings per share of $1.44) by about September 2027, down from $158.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2027 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Software industry at 38.6x.
• Analysts expect the number of shares outstanding to decline by 1.61% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

Risks

• The reliance on AI and other technologies for new product features and marketing strategies could increase operational costs, impacting net margins.
  
• Economic and regulatory challenges in emerging markets, which form a significant part of Opera's user base, could lead to unpredictable impacts on revenue.
  
• The company's focus on high ARPU users through targeted marketing could lead to higher marketing expenses, potentially reducing profit margins.
  
• Fluctuations in foreign exchange rates, particularly in emerging markets, pose a risk to revenue growth and could impact earnings negatively.
  
• Dependence on regulatory changes and platform openness, especially in the EU and with tech giants like Apple, introduces uncertainties that could affect the company's ability to expand its user base and, subsequently, its revenue streams.

Valuation

• The analysts have a consensus price target of $21.92 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 $25.0, and the most bearish reporting a price target of just $19.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $646.4 million, earnings will come to $125.8 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $14.97, the analyst's price target of $21.92 is 31.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.