Leon's avatar
$17.7m follower assets
September Idea Competition - Evolution AB $EVVTY
Thesis Summary

  • Evolution is the market leader in a rapidly growing and recession-proof market

  • Their innovative games and broad network of studios build a high moat

  • Platform with high operational efficiency and scalability results in high margins

  • Undervalued based on multiples and using an inverse DCF

Business and Industry
Evolution innovates, develops, and produces content for online casinos on a B2B basis. They have 500+ operators among its customers including DraftKings ($DKNG), Penn National ($PENN), Leo Vegas ($LEO), Rush Street ($RSI) or Betsson ($BETS).

The global gambling market had an estimated value of EUR 359 billion in 2021. In the past, the online gambling market has significantly outperformed the total gambling market. Evolution's core segment, Live Casino, is the fastest growing part of the gambling market with a 5Y-CAGR of 31.1 %. Thus, Evolution is active in a market with substantial secular tailwinds.

Source: Annual Report 2021

As you can see in the graphic below, the online gambling market has been resilient to crises.

Current live data from Evolution's gaming lobby indicates that the current environment is also not harmful to their business. The opposite is the truth. The average daily live players increased since January and recently even marked a new All-Time-High.

Source: evotracker.live

Evolution's Moat
The barriers to entry are relatively low, while the barriers to success are considerably higher. Live casino is a highly complex product that, in addition to a technical solution, requires both a certain volume and outstanding operational excellence to be profitable and perform satisfactorily. As the world-leading provider of online casino content, Evolution has multiple studios worldwide with over 15.000 employees and system availability of 99.87 %.

But the biggest moat is Evolution's world-leading online casino games portfolio. The games of Evolution are the most popular in every Live Casino. The Live Game Shows Evolution invented, attracts a new type of player to Live Casino which is crucial for successful customer acquisition. Until now, no competitor was able to develop similar successful & innovative Live Casino Games.

Another indicator that a certain moat exists is, that a customer of Evolution (Betsson) is not planning to develop an in-house live casino product. Though, they know that this could be a highly profitable business.

Source: Betsson AB Q1 Conference Call

Growth driver

  1. Shift from Offline to Online
It is expected that the shift from Land-Based Gambling to Online Gambling will continue in the future, which will further increase Evolution's TAM.

Source: H2GC

  1. Legalization of Online Gambling
Online gambling is still not allowed in many countries. However, because online gambling is a profitable source of tax revenue, many governments have concluded that a regulated gambling market is preferable to the current grey or black market.

Newly regulated markets will drive the demand in new geographies. Especially the legalization in the US is a significant growth driver for Evolution. Currently, only 6 US states have legalized online casinos, while nearly 3/4 of the states have legalized online sports betting. Further legalizations are expected. America will likely become the world's largest online gambling market.
Evolution already managed to become the leading online casino supplier in the US by a wide margin, especially in the Live Casino segment.

Besides the US, Evolution is also active in other rapidly growing markets like South America or Asia for example. In the last quarter Evolution grew in North America & Asia with 69% and in the "other" region with 49%.

Valuation & Financials

Evolution has a 3-Year Revenue CAGR (18-21) of 44% and Net Income CAGR of 64% at an EBITDA-Margin of 69%. In the last quarter, Evolution was still able to grow revenues by 34% and profits by 39%.

Mutiples:
You can currently buy this rapidly and constantly growing monster at NTM EV/EBITDA valuation of 15, MC/FCF of 19 and a forward P/E of 20. Historically, this is a cheap valuation for Evolution as you can see in the chart below.

Inverse DCF:
I used a simplified 5-Year inverse DCF-Model with the following inputs:

  • EBIT-Margin (2022 - 2026): 60%
  • WACC 8%
  • Terminal Rate 2,5%

At the current price of ~80$, a revenue CAGR (2022-2026) of 15% is baked in.

Given the rapidly increasing TAM of online casinos & Evolution's successful history of consistently outgrowing the market, Evolution should easily be able to beat this growth rate over the next years.
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Great analysis about a company I will never own. It sounds very compelling, but I can't get myself to consider investing in an online gambling company. In my opinion one of the most harmful things to society. No judgement, just my personal opinion on the matter.
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Leon's avatar
$17.7m follower assets
My portfolio: Evolution AB $EVVTY ($EVO.ST)
The next company of my portfolio i will shortly present is Evolution AB.

Evolution AB:
  • develops, produces, markets and licenses fully integrated B2B Online Casino solutions to gaming operators
  • has developed into a leading B2B provider with 500+ operators among its customers like DraftKings ($DKNG), Penn National ($PENN), Leo Vegas ($LEO), Rush Street ($RSI), Betsson ($BETS), and many more
  • employs about 10,000+ people in studios across Europe and in North America
  • has built a platform with high operational efficiency and scalability
  • has been named Live Casino Supplier of the Year 10 times out of 10 possible at the EGR B2B Awards thanks to it's innovative games and fantastic management
  • The games of Evolution are the most popular in every Live Casino which leads to the need for an operator to also offer Evolutions games, otherwise, the player would change the operator. Evolution's games and their broad network of studios build a high moat
  • Revenue CAGR (18-21) of 44 % and Net Income CAGR of 64 % and an EBITDA-Margin of 69 %
  • Long way of growth as Live Casino is the fastest growing Casino segment and Online Gambling will be regulated in more and more countries / states
  • NTM EV/EBITDA of 17 and NTM P/E of 21

This is a quick overview of what Evolution is doing. If you're interesting I will share more about what "What moves this stock" tomorrow. Stay tuned!
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