Nov 26, 2023·edited Nov 26, 2023Liked by Wolf of Harcourt Street
Thank you for this analysis. I don't really have an experience in this industry and for this reason I do not understand the following: if Evolution provides everything to casino operators - games, player authentication and other player related software services, physical tables and dealers - then why does Evolution need the casino operators? To be exact, I do not understand the role of the casino operators in this process, because it seems to me that everything is provided by Evolution that is required for an online game. Does the casino operator provide a web UI in which Evolution's product is embedded? What are the services that a casino operator can provide to players additionally to Evolution's services?
Another question for me - is there a percentage estimation for the overall market share of Evolution?
Thank you in advance if you take some time answering these questions.
The truth is that casino operators need Evolution more than Evolution needs casino operators. The casino operator owns and manages the live casino, being responsible for everything from business operations and marketing to customer service and regulatory compliance. The Evolution solution is an API that integrates directly with the casino operators website or app. It's the casino operator who needs to acquire customers for their casino. They handle player accounts and transactions. Additionally, the casino operator is on the hook if a customer wins money; Evolution is not. On the other hand, Evolution doesn't care which casino a customer uses, as long as the casino is using Evolution's solution. It doesn't make sense for Evolution to run its own casinos because the activities result in revenue that is far lower margin than Evolution's core competency.
There's no reliable estimate of Evolution's market share because the online gambling market is extremely fragmented, with many regions not regulated. However, we can see that Evolution has the most players at its tables at any given time based on third-party data, indicating its market leadership.
If I could seek one clarification. On this point that you mentioned ‘the live dealer salary becomes a fixed cost that can be leveraged across hundreds of potential concurrent players. This efficiency is in contrast to traditional casinos where live dealers serve only a few players at a physical table’
Isn’t the dealer still limited to the number of players at the table at any one point in time. Or in the case of a ‘live casino’ a dealer can dealer on multiple tables at the same time?
Glad to see someone from Ireland so passionate about equities. After living in Ireland for the last 5 years I can definitely vouch for the fact that equities are not considered as an asset class in this country!!
I know, right. Unfortunately, fear of the unknown as well as a restrictive tax system turn the majority of people away. Government policies are geared towards pensions or property as you will have seen.
Do you have any views on their customers eating their lunch? ie: creating their own live streaming platform when they have the scale by banding together? Essentially creating another company that controlled by them but providing the same services since it is an important channel to reach their customers (10% seems to be alot)? This will lead to the questions on do evo games like crazy time create so much incremental value to them? if most of the gamblers are gambling on traditional games like black jack, slots, etc, wouldn't their moat is weaker?
This is something I address as part of the risks in Section 7. I don't believe it's very likely that casino operators will band together to create a platform. How often, if ever, have we seen this work in other industries? It's far more likely that individual casino operators will try to create their own platforms. However, the lack of scale for a single casino operator means that the hurdle to success is quite high. One would need to commit several years to building the platform without any prior R&D experience, incurring a significant upfront cost. Even when you go to market, you run the risk of the product being rejected by users.
The only way to compete with Evolution is through scale. Evolution offers some of the highest RTPs on the market for traditional games, and if you were to offer the solution without its scale, you would have to provide lower RTPs to make it economically viable. In turn, this would turn end users away, given the more attractive alternatives.
Big risk factor is growth dynamic in Asia (higher than Europe and US) - market with high risk profile, where new regulations would kill the market. But of course, legalisation across Asia may be also liberalising, then more operators will try to compete there, and Evolution will have bigger TAM with lower risk profile.
In their annual letter they said that regulation is a key factor for their growth. I think it makes sense where it will attract more customers, less expanding into more markets etc. Wonder what’s your thoughts on that.
Thanks for your comment. I think regulation can be seen as both a risk and an opportunity. The opportunity is reflected in the expected growth of the online gambling market at an 11.7% CAGR over the next 7 years. The risk element is more on the margins as I outline.
I agree. Thanks for your research. My model gives me a little lower valuation than yours, mostly because I discounted more based on currency devaluation risk against the dollars. But really shared the same view as yours otherwise.
By looking at Euro to USD and Swedish Krona to USD. It seems that it could fluctuate as high as 10% a year over the next 7 years. I’m not a macro expert so I used a rough number and basically reduced the CAGR by 2%. From 16% to 14% IIRC. I think this would give me a reasonable margin of safety against this particular risk.
My valuation at the end comes close to yours but I was using a discounted P/E model. I have rarely seen a quality growth stock falls into DCF range with my discount rate. I do use higher discount rate than most of the analysts I read.
According to the below link, the top 3 are all Evolution customers, so I'd probably guess they're up there in its top customers ranking, ceteris paribus.
Thank you for this analysis. I don't really have an experience in this industry and for this reason I do not understand the following: if Evolution provides everything to casino operators - games, player authentication and other player related software services, physical tables and dealers - then why does Evolution need the casino operators? To be exact, I do not understand the role of the casino operators in this process, because it seems to me that everything is provided by Evolution that is required for an online game. Does the casino operator provide a web UI in which Evolution's product is embedded? What are the services that a casino operator can provide to players additionally to Evolution's services?
Another question for me - is there a percentage estimation for the overall market share of Evolution?
Thank you in advance if you take some time answering these questions.
The truth is that casino operators need Evolution more than Evolution needs casino operators. The casino operator owns and manages the live casino, being responsible for everything from business operations and marketing to customer service and regulatory compliance. The Evolution solution is an API that integrates directly with the casino operators website or app. It's the casino operator who needs to acquire customers for their casino. They handle player accounts and transactions. Additionally, the casino operator is on the hook if a customer wins money; Evolution is not. On the other hand, Evolution doesn't care which casino a customer uses, as long as the casino is using Evolution's solution. It doesn't make sense for Evolution to run its own casinos because the activities result in revenue that is far lower margin than Evolution's core competency.
There's no reliable estimate of Evolution's market share because the online gambling market is extremely fragmented, with many regions not regulated. However, we can see that Evolution has the most players at its tables at any given time based on third-party data, indicating its market leadership.
I hope that answers your questions.
If I could seek one clarification. On this point that you mentioned ‘the live dealer salary becomes a fixed cost that can be leveraged across hundreds of potential concurrent players. This efficiency is in contrast to traditional casinos where live dealers serve only a few players at a physical table’
Isn’t the dealer still limited to the number of players at the table at any one point in time. Or in the case of a ‘live casino’ a dealer can dealer on multiple tables at the same time?
A live casino could have 100s or 1000s of players on a game compared to physical casinos which are often limited to a handful of players.
beautiful analysis. Thanks!!
Glad to see someone from Ireland so passionate about equities. After living in Ireland for the last 5 years I can definitely vouch for the fact that equities are not considered as an asset class in this country!!
I know, right. Unfortunately, fear of the unknown as well as a restrictive tax system turn the majority of people away. Government policies are geared towards pensions or property as you will have seen.
Appreciate the feedback 👍
Do you have any views on their customers eating their lunch? ie: creating their own live streaming platform when they have the scale by banding together? Essentially creating another company that controlled by them but providing the same services since it is an important channel to reach their customers (10% seems to be alot)? This will lead to the questions on do evo games like crazy time create so much incremental value to them? if most of the gamblers are gambling on traditional games like black jack, slots, etc, wouldn't their moat is weaker?
This is something I address as part of the risks in Section 7. I don't believe it's very likely that casino operators will band together to create a platform. How often, if ever, have we seen this work in other industries? It's far more likely that individual casino operators will try to create their own platforms. However, the lack of scale for a single casino operator means that the hurdle to success is quite high. One would need to commit several years to building the platform without any prior R&D experience, incurring a significant upfront cost. Even when you go to market, you run the risk of the product being rejected by users.
The only way to compete with Evolution is through scale. Evolution offers some of the highest RTPs on the market for traditional games, and if you were to offer the solution without its scale, you would have to provide lower RTPs to make it economically viable. In turn, this would turn end users away, given the more attractive alternatives.
I hope that answers your questions.
Big risk factor is growth dynamic in Asia (higher than Europe and US) - market with high risk profile, where new regulations would kill the market. But of course, legalisation across Asia may be also liberalising, then more operators will try to compete there, and Evolution will have bigger TAM with lower risk profile.
Agreed regulation can be viewed as both an opportunity or a risk for Evolution depending on which lens you view it through.
In their annual letter they said that regulation is a key factor for their growth. I think it makes sense where it will attract more customers, less expanding into more markets etc. Wonder what’s your thoughts on that.
Thanks for your comment. I think regulation can be seen as both a risk and an opportunity. The opportunity is reflected in the expected growth of the online gambling market at an 11.7% CAGR over the next 7 years. The risk element is more on the margins as I outline.
I agree. Thanks for your research. My model gives me a little lower valuation than yours, mostly because I discounted more based on currency devaluation risk against the dollars. But really shared the same view as yours otherwise.
Thats interesting, do you mind sharing what assumptions you've used in your calculation?
By looking at Euro to USD and Swedish Krona to USD. It seems that it could fluctuate as high as 10% a year over the next 7 years. I’m not a macro expert so I used a rough number and basically reduced the CAGR by 2%. From 16% to 14% IIRC. I think this would give me a reasonable margin of safety against this particular risk.
My valuation at the end comes close to yours but I was using a discounted P/E model. I have rarely seen a quality growth stock falls into DCF range with my discount rate. I do use higher discount rate than most of the analysts I read.
I'm based in Europe so the FX risk is immaterial to me but your adjustment is reasonable.
Who is their largest customer? It's too big to be either Entain or Flutter
According to the below link, the top 3 are all Evolution customers, so I'd probably guess they're up there in its top customers ranking, ceteris paribus.
https://www.imarcgroup.com/top-online-gambling-companies
Good find
It is not disclosed unfortunately