Man, I haven’t shared company specific anything here in so long, it’s an abomination. I owe you all an apology. It’s not even a matter of telling you all why, I just have to straight compensate you all at this point. Especially the more investment minded of you. Pele.
Anyway, one of the companies that has been on my radar lately is Evolution Gaming. They’re a Sweden listed company that builds online versions of casino games that can be played both in actual casinos (using online connected screens) and through smart devices that try to replicate the casino environment.
Why do I like them?
- Casino games are one of those consistent demand things, due to their habit forming (read addictive) feature and the gambling aspect. People will always play these games.
- Evolution Games is spearheading the migration towards playing a large variety of casino type games like BlackJack, Texas Hold Em, etc online and these are games that you still pay to play them online. And online casinos don’t have open and close hours which means they’re open 24 hours a day, seven days a week, an advantage their physical counterparts don’t have.
- By allowing players to play online and also play on screens in actual casinos they allow more people to play in the same spot, which increases participation and revenue compared to if only people physically present can play. Table dealers can work with multiple online sessions at once, since its virtual, which means more scale with the same number of employees.
- It is run by its founders and the passion and level of knowledge is evident in their innovative game launches, standard of operations and execution style. I like founder run companies.
- Online gaming as a whole is a growing industry, with broadband penetration increasing rapidly all over the world and payment systems allowing more people to do more of their gaming online.
Now, having established that I like their business, I will dive down into some of their financial and operational data to evaluate why it’s a good company to buy for the long haul.
First, the company is operating in mainland Europe, with gaming studios in low cost jurisdictions Malta and Latvia, servicing gamers in UK, Netherlands, Spain, Latvia, Malta, Romania, Italy, Denmark, Belgium, Bulgaria and Georgia. They’re signing up additional customers in additional countries as much as regulations allow. They also have a new studio in Canada to start targetting the North American market which should be a source of huge new growth, especially south of the border once Vegas and New Jersey realize the possibilities. They usually design and brand online casinos for existing casino companies, so customers don’t really interface directly with Evolution, but instead play as if they were in their familiar physical casino company, like Grosvenor in the UK (which is one of Evolution Gaming’s biggest clients).
Evolution had revenues of $208.7M in 2017, an increase of 55% from the year before. Over the last four years it’s revenues have increased 51, 31, 52 and now 55% year over year which is a remarkable rate of increase. And their EBITDA (a measure of their operational profitability) was around $93.3M which is an unbelievable 81% increase over the previous year. Again, going back a few years back, you see that that’s an increase level they’ve delivered in more than one year. To me that signals an incredible level of growth and profitability. Their EBITDA margin is around 45% and since majority of their cost is for personnel, it should grow more slowly than revenue since most of that personnel is game hosts and like I pointed out earlier, one game host can serve multiple online games. So revenue will grow faster than costs leading to bigger profits. Sign me up for that.
I won’t bore you with their different game offerings and game types, including generic tables, specialized or custom tables, and all. Their business model like I pointed out before is to design these gaming environments for their casino clients and charge fees and commissions on the back end. So Grosvenor customers for instance would see a Grosvenor online casino, but Evolution provides the gaming technology and environment and charges Grosvenor a cut of revenues as well as installation fees and commissions. Works out really well.
And as for the quality of their offering compared to the rest of their industry, I really love what I see. They won Digital Product of the Year in their industry awards in Vegas last year for their newest gaming product as well as Live Casino supplier of the year 8 years in a row. In other words, anyone who wants to do this business will come to them. That gives them earning power and market share. Online casino gaming is growing faster than brick and mortar and is currently about 29% of the industry, and Evolution Gaming owns about 50% of that market and growing faster than their peers.
What I’m eager for is for them to get into the US market. There are regulatory reasons why they haven’t yet, but they’re working hard on it and it’s going to do wonders for their business.
There are several other things to know about the company but I will encourage you to go do your own research and understand whether or not this is a company you want to get into.
One weakness I see is that this is a business that could easily get commodified over time as everyone eventually figures out either how to go online by themselves or finds a cheaper but just as satisfactory client to do it for them. After all, how innovative can you remain in an industry where most of the games being played are classics that haven’t changed for decades? This isn’t Fortenite we’re talking about here.
However, with the investments Evolution keeps making into operational excellence, branding, growth and innovation it will be a while before the market competition catches up to them and in that time, an investor will reap a lot of rewards. So personally, I consider Evolution a solid buy. But do your own research and come to your own conclusions. I’m not responsible for your investment outcomes.
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