Leon's avatar
$18.5m 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

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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).

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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.

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Source: Annual Report 2021

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

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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%.
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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.
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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%

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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.
Leon's avatar
There are so many more information I would have included into the write-up, I really had to struggle with the word limit. But what should not be forgotten is, that an investment in $EVVTY has, like every other invest, some risks:

Licenses / Black Market
In the gambling sector there are operators (Online Casinos) like DraftKings, Penn National, Rush Street and so on. Evolution is just offering its content to these online casinos on a B2B basis. Sometimes between these two parties are also B2B aggregators. So Evolution does not offer its content directly to the end consumer. But in many regulated jurisdictions, the B2B supplier like Evolution also needs a B2B license from the regulator to be allowed to supply content to the licensed operators.
In November 2021 an anonymous third party published a short report. In this report, the author claimed that Evolutions games are accessible from countries under US sanctions and also in black markets which don't comply with the B2B license regulations. Evolution published a statement that these allegations are not true and that the results shown in the report have only been possible through active manipulation of Evolutions systems using VPN tunnels. Further Evolution states that it's the responsibility of the operator who has direct contact with the end-consumer to do a proper KYC while Evolution only has to check his own customers (operator /aggregator). After the short report many investors were unsure if these allegations could have an impact on Evolutions licenses, especially in the US market. Losing licenses in the rapidly expanding US market would have a material impact on Evolutions future revenues. But since the report there hasn't been any further investigation from the US Gaming enforcement which suggests that there haven't been any problems. Instead, Evolution has opened many more studios in the US since then.

Evolution is growing organically but also uses its free cashflow to acquire companies. In June 2020 they announced to acquire NetEnt which was one of their bigger acquisitions in the past. With NetEnt, Evolution added Slot Games to their portfolio to offer their customers the complete range of Online Gambling as a one-stop-shop. Since then they primarily acquired some smaller companies like Big Time Gaming, NoLimit City or DigiWheel. Most of them primarily add IP that Evolution can use in their own games or expands their game portfolio.
Acquiring companies should always have more value for the shareholder than distributing the cash via Dividends or buying back shares. So as an investor you should have a look at the value of the acquisitions. The slot segment, that Evolution acquired through NetEnt for example performed under the expectations of the management. But the offering as a real one-stop-shop has just started, so one should give the management some more time in my opinion.

Losing Key Personal
As I outlined under "moat", Evolutions innovative games are the key to widen their moat. The Mastermind behind these innovative games is Todd Haushalter (CPO). Losing him (especially to a competitor) could have huge impact on Evolutions ability to develop innovative games. But with the acquisitions of Big Time Gaming and NoLimit Citiy, Evolution also acquired some highly talented people that invented innovative games in the past.

Shift in regulations
Currently it seems like many countries are thinking about legalizing gambling to increase their tax revenues. But no one knows and maybe some countries will do the opposite and decide to ban online gambling. Instead of increasing the TAM for Evolution, this would of course reduce it and limiting the growth potential for Evolution.
Heavy Moat Investments's avatar
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.
Leon's avatar
@stonkmetal I understand that. It is as always with harmful things: The dose makes the poison. For my investments i chose a simple rule. Would i use the product? If yes, i can invest. If not no. Sometimes it‘s really fun playing some online poker for me. On the other side i wouldn‘t invest in tobacco companies as i don’t smoke.
Heavy Moat Investments's avatar
@mavix Fair approach and no judgement here, I mean many people probably also would have a problem with $RICK, which is my second largest holding. I hope it goes well for you, the fundamentals definitely suggest as much.
Conor Mac's avatar
@mavix Great write up Leon. Really liked this framing "The dose makes the poison" for things that may be frowned upon from society. I tend to have the same opinion on gambling. For the intention of seeking adrenaline and excitement, something like Vegas can be very fun.

But the individual has to go into that expecting to burn a set amount of cash, and not expected to be chasing losses. Sinful pleasures can be enjoyed in moderation.
Leon's avatar
@investmenttalk Thanks Conor! Exactly my thoughts regarding sinful pleasures 🙌🏻
Arthur Svidzinski's avatar
That looks great ideed!
Yegor's avatar
$EVVTY is one of the companies that I am most (currently) excited but also cautious. Been thinking about any possible ways for them to get disrupted(realistically not counting crazy scenarios) and I’m having hard time although I have to say the ATH price was crazy if anyone thought that would keep going but now getting interesting
Leon's avatar
@from100kto1m I think the only way, evo could get disrupted is when a competitor develops a completely new game style, like evo did with their game shows, that attracts more and also new players. That‘s why I think the most important aspect for evo is to stay innovative
Yegor's avatar
@mavix which likely it seems they are doing
Scoreboard Investor's avatar
Nice write up. Is there any patent protection on their games or IP? I understand the moat and that they are already a frontrunner, but what is preventing other studios from creating very similar games?
Leon's avatar
@scorebdinvestor no IP protection for the game style itself afaik, just some patented game mechanics. But nothing really that premiere competitors to copy the games. And that‘s why the competitors already have similar games. They really look nearly the same from the outside, but less details and extra roundtable etc 😄 Despite these nearly similar games, Evolutions games continue to be the most succesful every day on the live casino lobbys. I would compare it maybe with other gaming companies. Every gaming company could try to build a game like GTA for example. But still, no one would be succseful with it as the GTA team is obsessed with details that makes these games unique.
Sagar Vensi's avatar
The management's execution here is amazing. Thank you for this.