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Evolution AB (ISIN: SE0012673267) is the leading B2B provider in the online casino market and is known for its innovative live casino and RNG games. The company has been experiencing strong growth for some time, which is additionally fueled by strategic acquisitions. The long-term trend here has been upwards. Over ten years, for example, the share price has risen by almost 7,000 percent. In addition, dividends have risen regularly.
However, the equity story of the Evolution AB share has become less attractive in recent years. Over three years, the share price has fallen by almost 29 percent. Although a favorable valuation currently speaks for the share, there are also risks that investors should keep an eye on. In particular, the high level of activity in non-regulated markets and a possible slowdown in growth could pose challenges. Despite these risks, Evolution remains a key player in the industry that is constantly looking for new ways to consolidate and expand its market position. Let's dive deeper into the world of online casinos with the following Evolution AB stock analysis.
The most important facts in brief
Evolution AB is a leading global provider of live casino services and RNG (Random Number Generator) games. The company's business model is thus based on the provision of high-quality games and services for online gaming providers worldwide. The focus is on business customers (B2B).
Evolution AB differentiates its business model into two main business areas: Live Casino and RNG games. Around 40 percent of its activities take place in regulated markets.
In the live casino segment, which accounted for around 85 percent of revenue in the 2023 financial year and recorded growth of 28.2 percent, Evolution broadcasts games such as roulette, blackjack and poker in real time from special studios, often with multiple cameras to provide different angles. Players can chat with dealers and with each other, enhancing the user experience. Casino operators have the opportunity to customize the look and feel of the games to suit their own brand.
In the RNG games segment (15 percent of revenue and revenue growth of 2.6 percent in financial year 2023), Evolution offers a variety of games such as slots and virtual table games. These games are based on random number generators that ensure fair and random results.
The RNG segment includes a variety of games such as slots (slot machines), virtual table games and instant win games. Examples include well-known slot titles such as “Starburst” and “Gonzo's Quest”. The games are often seamlessly integrated into the casino operators' platforms and can be used by many players at the same time. Evolution often works with well-known brands to develop thematically varied games that appeal to a wide audience.
Evolution AB generates its revenue mainly from contracts with online casino operators. It is therefore a B2B business in which commercial business partners face each other on both sides. Evolution AB receives fees based on the turnover generated by its games. These fees may include both fixed and revenue-based components. In addition, Evolution receives license fees for RNG games and certain content. Furthermore, the company offers additional services such as customized game development and marketing support, for which fees are also charged. The combination of different revenue streams enables Evolution to grow continuously and to extend its market leadership in the online gaming sector. Above all, however, Evolution benefits from the online gaming megatrend. This is driven by digitalization, globalization and liberalization
The most important internal growth drivers for Evolution AB are the continuous introduction of new and innovative games and the expansion of partnerships with online casino operators worldwide. By constantly improving its technology and user experience, the company is able to attract and retain more players. Expansion into new geographic markets and adaptation to local regulations also contribute to growth.
In addition, inorganic growth - i.e. the acquisition of other companies - in the gaming sector also helps to expand the product range and open up new sources of revenue.
Evolution AB's main competitors in the B2B segment of online gaming are Playtech, Microgaming and Pragmatic Play. These companies also offer a wide range of live casino and RNG games and compete for partnerships with online casino operators worldwide.
Playtech is known for its comprehensive software solutions and innovative games, while Microgaming is one of the oldest and most established providers in the industry. Pragmatic Play has made a name for itself through rapid innovation and a wide range of games.
Acquisitions are part of Evolution AB's growth strategy. NetEnt was an important acquisition in 2020, followed by Big Time Gaming (2021), Transigo (2021), Nolimit City (2022) and Livepins (2024). The recently launched share buyback program also shows that the management may consider its own shares to be a good investment.
Strong sales growth of 33% in the 2023 financial year not only underlines the company's own growth ambitions. Thanks to the high scalability of its platform business, Evolution AB has been generating respectable profitability with rising margins for years. The EBIT margin has risen continuously over the last twelve months (TTM) to over 63%.
However, there are also criticisms of the share. They relate to the strong dependence on the European market, which makes the company vulnerable to regulatory changes in this region. Possible dependencies on individual customers could also jeopardize the company's success.
There are also concerns regarding the ethical aspects of online gaming and the possible promotion of problematic gaming behavior. In addition, further expansion and competition with other providers on the market could lead to price pressure and falling margins. Some critics complain that the company's innovative strength could diminish if new and attractive games are not constantly developed. Finally, there are concerns about possible technical problems or security gaps that could affect player confidence.
The fact that around 60 percent of the company's business is in unregulated markets can represent both an opportunity and a risk. As an opportunity, entering non-regulated markets offers the possibility of acquiring new customers and expanding the business quickly, as these markets often have less competitive pressure and fewer regulatory hurdles. This can lead to rapid sales growth and help the company to strengthen its market presence worldwide.
On the other hand, operating in unregulated markets entails considerable risks. Without a clear regulatory framework, there is a risk of legal uncertainty and possible sanctions if regulation is later tightened. There is also a risk of reputational damage, as operating in such markets could be perceived as unethical. In addition, unregulated markets are often more susceptible to fraud and other security issues that can affect player confidence and the integrity of the games.
The latest quarterly figures from March 2024 relate to the first quarter of 2024 and should be interpreted positively, even if growth is weaker compared to the full year 2023 with a decline in revenue of 18 percent to 5.7 billion Swedish kronor. It is also noticeable that earnings have risen more slowly across the board, which points to margin problems. This can be explained by increased costs in connection with new game developments. According to the management, however, this should only be of a temporary nature.
Let's move on to the segments: Revenue in the Live Casino segment rose by 19.8 percent, while RNG revenue increased both quarter-on-quarter and year-on-year to €70.1 million. Evolution continued to increase its table capacity and recruitment efforts, introduced new games and saw growth in all regions, particularly in Asia and North America. Evolution AB describes the momentum as still strong.
For 2024, Evolution AB plans to continue to launch new games and expand its studios worldwide. The Swedes also expect that ongoing investments in technology and infrastructure will lead to higher future revenues, but could put pressure on margins in the short term. Despite this, Evolution remains confident of maintaining its EBITDA margin in the range of 69-71 percent and continuing to offer innovative gaming experiences.
Analysts tend to take a similar view. Although a slowdown in growth momentum is expected in each of the coming years, revenue is still expected to show double-digit growth until 2026. In 2027, turnover of 33.5 billion Swedish kronor could be realistic - 63% more than in 2023.
The year 2024 is likely to be a year of consolidation with an expected increase in sales of a good 19 percent. The increase in EPS is likely to be significantly lower at 8 percent. However, this figure is also likely to increase again in the medium term and even exceed sales growth.
In the High Growth Investing analysis, the Evolution AB share has a convincing score of 12 points. A particularly high number of points were generated for the leverage ratio (0.02), the PEG ratio (0.66) and the Rule-of-40 score. Three out of three possible points were achieved here. One point each was awarded for sales growth in the last 12 months TTM of 27.2 percent, the gross margin value of 63.2 percent and the EV/sales ratio of 10.4.
Looking to the future, profitable growth is still expected, but this is only expected to amount to just under 20% sales growth in the 2024 financial year. Compared to the past, this would be a significant deterioration and would also lead to a loss of points in the HGI analysis in the future.
The valuation of the Evolution AB share was classified in the HGI analysis as tending towards fair to favorable for a growth company. A sales multiple of 10.4 was reported for the EV/sales ratio, which may be high, but still tolerable in view of the growth. In addition, the company already has good profitability.
The PEG ratio is more specific: a value of 0.66 could represent a significant undervaluation for the growth on offer. However, one must always look to the future with all key figures. And here it is particularly clear that the high growth of the past will probably not be sustainable in the future. At least that is what many analysts are assuming.
Despite a potential slowdown in growth, the share can also be classified as inexpensive in terms of traditional key figures such as the P/E ratio, which is expected to be 18.2. As high free cash flows are also generated, the free cash flow multiple is even below the P/E ratio.
The favorable valuation is primarily due to the existing risks of the online casino share. After all, the company operates predominantly in unregulated markets, which represents a major uncertainty factor. In addition, growth has been driven by acquisitions in the past. It is therefore a case of inorganic, distorted growth.
Evolution AB has established itself as a leading B2B provider in the online casino market and impresses with its wide range of live casino and RNG games. The company has seen impressive growth in recent years, boosted by strategic acquisitions of industry giants such as NetEnt, Red Tiger Gaming and Big Time Gaming. These acquisitions have not only expanded the product portfolio, but have also significantly strengthened Evolution's market position.
Nevertheless, there are also challenges and risks that should not be ignored. For example, the high level of activity in unregulated markets. Although this can lead to rapid sales growth in the short term, it harbors long-term legal and reputational risks. There is also a risk that the company's rapid growth could slow down further, particularly if market conditions change or new regulations are introduced.
It should also be noted that competition in the industry is very intense. Evolution must constantly innovate in order to maintain its leading position. The latest takeovers show that Evolution is buying market share. However, these transactions may ultimately represent a further risk.
The favorable valuation reflects precisely this. On the other hand, it also represents an attractive investment opportunity if the management's strategy works out and risks do not materialize in full. Most analysts currently seem to assume that this is the case.
Source: Analysts' opinions on Evolution AB shares
Around 71 percent of analysts rate the share as a buy. The average price target is 30 percent above the last price of SEK 1,130.