Evolution AB: Galaxy Gaming Acquisition Accelerates US Expansion (OTCMKTS:EVVTY)

Vincent Besnault/DigitalVision via Getty Images After the release of Q2 2024, the market punished Evolution AB (OTCPK:EVVTY) with -8.52%, leading the stock to trade just below the $100 per share threshold. What triggered this reaction? Mainly what worried investors was a decline in revenue growth, as well as a deterioration in profitability. As far as I am concerned, I find this an unwarranted reaction, and in this article, I will explain why. So, EVVTY remains a buy, but if it continues to collapse, there may be grounds for a strong buy. Highlights Q2 2024 Evolution Q2 2024 In Q2 2024, EVVTY generated revenues of €508.40 million, up 15% year-on-year. Also, on a constant currency basis, growth was 19%. Evidently investors expected more, but a near -9% drop after revenues increased more than double digits seems like an overreaction to me. After all, EVVTY cannot grow 20-30% every year, and it is understandable that there are years when growth slows down a bit. Incidentally, one of the main reasons that reduced revenue growth is purely coincidental. To put it simply, during the last quarter there was the largest pay-out ever at Crazy Time. While this episode attracted new players, it also negatively impacted EVVTY’s coffers. A similar argument applies to the EBITDA margin, which went from 69% to 68%: it is still an outstanding result that even the big American tech companies cannot achieve. Overall, I believe that EVVTY has not yet reached its full potential, it is just going through a slightly more complicated moment than in previous quarters. Actually, as far as the margin issue is concerned, the company is fully aware of what is happening, and is sacrificing short-term performance in favor of long-term performance. Evolution Q2 2024 The increase in staff was again significant compared to the previous quarter, and this factor is weighing on margins. The company is in the midst of expansion, needs more staff, and is outlining its new organizational structure. Full efficiency in this area takes time, which is why there may be momentary swerves on margins in the short term. Here is what the recent investments consist of: Introduction of Evolution’s games into new markets about to be regulated. Among the most important are Philippines, Brazil and Czech Republic. Completion of new games to be released in the second half of 2024. They will be more than those released in the first half of 2024. During 2024, the company will open new studios in Colombia and Czech Republic. About 100 new games will be released in 2024. In Q3 it will be the turn of Lightning Storm, one of the most anticipated live games of the year in which the company has its sights set on. Evolution Q2 2024 Activity in the network has increased 37% over last year and has outpaced revenue growth. This means that there are more and more players, but they are betting low amounts. So, this is a sign that the expansion plan is working. Evolution Q2 2024 Regarding revenue by region, the results achieved in North America were disappointing, as there was a decrease of €1.90 million. This geographic area represents both Evolution’s main problem and its most important growth driver. The United States is a thriving market, but it is not easy to enter if you are in the live casino games business. Each state has its own regulations to comply with, and being able to have a footprint across the country is a tough task. Over the past few years, EVVTY has partnered with a number of companies already in the area, and recently introduced the first live game in Delaware. Offerings in the United States are increasing, but clearly not enough to boost revenues. For this reason, management decided to change strategy, and a few days ago bought Galaxy Gaming (OTCQB:GLXZ) for $85 million. Probably, the market did not digest this news well either. Seeking Alpha As you can see from this image, GLXZ’s financial results are not exciting. We are talking about a consistently loss-making company with ups and downs; so why was it paid so much? The reason I believe lies simply in the fact that GLXZ is based in Las Vegas and has 130 licenses worldwide, including 28 states in the US. Through it, EVVTY will be able to accelerate the process of penetration into North America and face fewer bureaucratic barriers. This is a strategic move, and one that probably has little to do with the company’s own gaming offerings. In fact, GLXZ will continue to operate independently, as if it were a separate business. The market might think it was overpaid, but in my opinion the potential to operate in the U.S. is worth much more than $85 million. The entire transaction will be paid for in cash: as you know, EVVTY has more liquidity than debt. After all, I remind you that this company has a free cash flow margin above 60%, so it knows quite well how to generate cash. TIKR The recent slump has led it to have an NTM Market Cap/Free Cash Flow of just 16.75x, significantly lower than the average of 35.27x calculated since the IPO. Personally, I do not doubt that EVVTY deserves lower multiples today since growth is no longer what it was a few years ago, however 16.75x I believe is too low for a number of reasons: EVVTY, in spite of everything, continues to grow by about 15% per year, and I would not be surprised at steady double-digit growth in the coming years. The expansion plan in the US may be a turning point to generate a new bullish cycle. The free cash flow margin is among the best in the world; there are currently no competitors that can seriously challenge its dominance. For all these reasons, I believe EVVTY is a buy. Of course, this is not a risk-free investment, I want to point that out. EVVTY operates in a market where regulatory risk is a crucial factor, so you can consider it a sin stock. All it takes is a change in the law, a cap to gamble in live casinos, to generate strong negative sentiment toward this company. Also, EVVTY is only traded on the Stockholm Stock Exchange, and this can result in significant buy/sell fees depending on your broker. Personally, I believe the benefits outweigh the risks, but make your own considerations. Conclusion In addition to high profitability and double-digit growth, EVVTY is known for its shareholder focus. Evolution Q2 2024 EVVTY distributes at least 50% of its profits in the form of dividends every year; this makes it an excellent dividend growth company. In addition, the remaining cash is often used to purchase its own shares and further remunerate shareholders. In other words, this company generates a lot of cash, and much of it goes back into the shareholders’ pocket. Recently, a €400 million buyback plan was announced, a great move in my opinion given the current price per share. Overall, I cannot see this quarterly as negative, as the company is setting the stage for a new bullish cycle. Revenues have slowed their growth, but still remain sound; same goes for profitability. The expansion plan is still in place, and in the coming years EVVTY’s offerings will expand into more states in the U.S.-the acquisition of Galaxy Gaming served this purpose. Meanwhile, Asia, Europe, and South America continue to be reliable markets. Although capital gains for the time being lag, shareholders can count on dividends and buybacks. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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