The Gambling Company With Unreal Potential
Darius Dark
Evolution AB (Ticker: EVO in Stockholm and EVVTY or EVGGF globally) is a prominent B2B provider of live, real-time casino streaming solutions, enabling players to engage directly with dealers via the internet. The company features traditional table games such as poker, blackjack, and roulette, alongside innovative game show-style experiences like Monopoly Live and Crazy Time.
It’s software and infrastructure are licensed to online gambling operators globally, offering a turnkey service that includes professional dealers, high-definition video streaming, and game development. This end-to-end solution ensures operators receive a fully integrated product tailored to modern gaming demands.
Formerly known as Evolution Gaming Group AB, the company was established in 2006 and maintains its headquarters in Stockholm, Sweden.
Shares in Evolution have seen a significant decline from the company's highs in 2021, over 60%! This is extremely strange considering in the same time-frame, almost every relevant metric improved greatly, as shown below.
The 5 years have seen unbelievably explosive growth, with Revenue increasing an average of
44% YoY
over the last 5 years. Looking at analyst expectations of future growth, they expect around 12% Revenue Growth, a large slow down. This certainly justifies valuation to decrease, but definitely not to such a drastic margin.
The company is also currently dealing with a union in Georgia striking and taking other illegal action according to their Q3 2024 Earnings Call. This limited their output in the affected studio to only 60%. The CEO also said they are increasingly battling with cyberattacks in Asia. These struggles obviously increased costs and hurt margins, but these struggles are temporary. The management seems to have understood the importance of these issues, and I am not worried long term.
Evolution has also been seeing relatively slow progress in its Random Number Games (RNG) segment. While the segment did grow by 8.5% YoY in 2024, the overall performance fell short of the company's target. This contributed to a reduced earn-out liability of €59.65 million related to the firm's acquisition of Big Time Gaming.
Looking at these factors it is hard to justify a 60% decline in share price, so let’s look at why the company is worth investing into.
Experts are currently expecting the online gambling market to grow 12% YoY until 2030, and Evolution looks to be the leading company to capitalise on this rapidly growing industry.
Live casino games are mostly classic casino games, including Roulette, card games like Blackjack, Poker and Baccarat, and dice games such as Sic Bo and Craps. They also also include famous Game Shows such as Cash or Crash, Crazy Balls, Monopoly, and Deal or no Deal.
The theme of these games is that players experience a genuine casino atmosphere with real dealers from the comfort of their home. Evolution AB is a clear market leader in this segment, with a market share of over 60%. Comparatively, it’s closest competitor Playtech has only a 15% market share. This is clearly a completely dominant company.
Despite it’s market share, Evolution AB has consistently outgrown the market, with Evolution’s Live Casino growing 38% from 2019 to 2023 compared to 24% for the broader market. Given the high share of total revenue coming from the Live Casino segment (around 86%, the rest being made up by RNG), this strong performance has substantially boosted total revenue growth.
Importantly, Evolution is not a casino operator. Evolution creates the above online casino content on a B2B basis, which means that each of these games can only be played through the interface of a casino operator. The casino operator simply adds player account management and the user interface. This is a favourable business model since Evolution can simply charge commission on all of their games, and also a fixed fee for using their product.
Both commission and fixed fees are paid by customers monthly with the average agreement duration of 3 years, providing recurring cashflows and good visibility on future revenue. In addition, a smaller portion of the revenue is made in the form of set-up fees, which are charged to new customers in conjunction with their new casino offering. This makes them extremely predictable, a trait I love in any company.
To be clear, I am talking about the moat around the Live Casino business, which represents 86% of Evolution's total revenues. The moat around RNG has yet to be built for this side of the business to gain any meaningful traction, but I would consider this a bonus, the real business is untouchable. This moat realistically comes down to one factor: Scale.
This is demonstrated in two different ways:
In 2023, Evolution's largest customer represented 13% of sales, which is about $258 million revenue. With such a significant spend to potentially save on, it seems logical that the customer would built Evolution’s capabilities themselves.
It turns out that building in-house live casino solutions is extremely expensive for most casino operators due to high fixed costs, talent challenges, and long lead times, making Evolution a much more logical choice.
Evolution dominates the live casino market, offering a superior product that delivers the best ROI. Evolution's scale (4x larger than the nearest competitor PlayTech in the Live Casino segment) allows the company to spend significantly more on innovation. This generates both quantity and quality in it’s products.
Evolution AB released over 100 new games in 2023, with PlayTech only launching 20-25. This drives greater player activity. Looking at quality, Evolution games generate on average 2-3x more revenue for operators on a like-for-like basis than PlayTech.
This means that if an Evolution game generates $100 for a casino operator, a competitors’ games will generate between $33 and $50 on average. This means that even if Evolution charges a premium take rate of 10-15%, the casino operator will always make more money going with Evolution.
These two factors make Evolution untouchable in my eyes. As the largest live casino provider, they benefits greatly from network effects. The more players play on the Evolution game platform, the harder it becomes for operators to switch to competitors. This is especially true since many players enjoy gaming with friends online.
Judging by the stock’s performance, one might expect that the performance of Evolution as a company has suffered since early 2021. While there have been some issues, the financial numbers haven't gone down, the opposite has happened. From it’s peak in 2021 to now, profit and operating cash flow have roughly doubled.
The numbers speak for themselves. Looking at the last few years almost every metric shows growth, operating income is impressively up almost 400%!
Since 2021, the number of diluted outstanding shares has been steadily declining. This twill also be reduced further since in July the company announced that a 100% of excess cash will be returned to shareholders, mostly via buybacks. They do consider opportunistic M&A activity, however this will still leave plenty of room to reduce the shares outstanding.
Looking at the balance sheet, the amount of goodwill and other intangibles is something that really stands out to me - being about 60% of total assets. This is not too concerning since this company produces a significant amount of cash flow. As compared to 2020, the percentage of the asset base has gone down considerably while current liquid assets have risen in this regard.
Total liabilities are less than the total current assets. This results in a net cash position of USD 648 million. This balance sheet in my opinion is absolutely pristine. The largest growing liability is the tax bill and that only grows if the company is more successful, so really we want it to!
The cash flow statement is again utterly beautiful. Cash flows are rapidly growing and CAPEX plus the purchase of intangibles are less than 10% of that. This leaves plenty of financial optionality to do M&A or return capital to the shareholders. Since the company is extremely asset-light and has a cash return on equity of over 30% plus net cash, it will most likely continue to reward shareholders over the coming years. From a numbers point of view there is basically nothing to dislike about this company.
If we look at their valuation metrics on Morningstar, the company has only been as cheap as it currently is at it’s IPO.
A PEG ratio of only 0.28x is unbelievably low for such a high-quality company. Given the nature of the business it is hard to pitch it against peers, but based on the financial statements, growth and price this should not be required. The current price looks like an incredible entry point even with a large margin of safety, and the company seems incredibly undervalued to me.
Performing a DCF valuation we can estimate an EVVTY fair value of $363.83, a 300+% increase away from the current price of $80.55.
The P/E ratio is also at an all time low, another factor signalling a massive undervaluation in the company.
Everything about the company looks amazing, but we also have to understand the potential future risks associated. Let’s take a look:
The main risks not already mentioned comes from the sector in which Evolution operates. While gambling has been lucrative throughout most of history, it does come with much more regulatory risk than nearly any other industry.
Any changes in licensing requirements, or maybe even complete bans, could therefore hinder Evolution's expansion or even destroy existing markets. Regulations in the anti-money laundering, youth protection, and data privacy also pose a big risk for the company as it obviously has to maintain a large and costly compliance department, which will only grow if more regulation is put in place.
In the case of a prolonged economic downturn, consumers of the online casinos could cut down their spending which would also lead to lower revenue for the operators, which in turn also negatively impacts Evolution AB. This seems very unlikely at the moment but should be given thought nevertheless.
The nature of the business also obviously makes an investment in Evolution difficult for institutional investors from an ethical perspective. This is not an inherent problem, but certainly means the stock is less marketable to diverse audiences than most.
Overall, the company looks to be in an extremely strong position to continue to compound it’s cash flows. The company’s practice of returning all excess cash to shareholders is something I love. I think the company is definitely a buy, and at the current price of $80.46 I believe it is Extremely Undervalued.
Thanks for Reading!