I think the class actions are short term noise, and more than priced into the stock.
As far as risk from Evolution providing games to aggregators, who in turn may provide them to customers in illegal markets - is it possible this is happening? Yes, it's possible.
Ultimately, the question here is if you trust Evolution's management. Personally, I do. They have ownership stakes in the company. They're buying back shares. They're building new studios and offices. Every customer Evolution sells to is licensed. Evolution says they do diligence beyond that - from the article you linked:
"Evolution supplies both licensed B2C casino operators, which then supply the games to players, and licensed B2B-actors, which then supply the games to B2C licensed operators, which in turn offer them to players.
“Evolution demands all B2B operators to perform a robust KYC on their B2C customers (our sublicensees) and Evolution performs an abridged due diligence on those sublicensees before approving them.”
Because we don't know how much of Evolution's revenue comes from aggregators, who those aggregators supply games to, etc. I think trying to estimate the impacts is a waste of time.
Evolution is far and away the leader in online live casino. Part of their advantage is the quality of their games and their size, but part of it is their reputation. I have a hard time believing they'd risk it by knowingly providing games to an aggregator who was operating illegally. Like I said, it could be happening. But I doubt Evolution's management is knowingly or actively participating in it. As long as that's the case, I think Evolution's risk is minimal.
Thank you for the excellent article! However, as Mujo_Investing mentioned, I believe Pragmatic Play is clearly a formidable competitor.
Upon examining online casino operator sites, I've noticed that games provided by Pragmatic Play, such as Mega Wheel and Sweet Bonanza Candyland, are attracting numerous players. Although Evolution's games typically have 2-3 times more players when I checked, Pragmatic Play's games demonstrate clear competitiveness and quality, suggesting they may be gaining ground.
Moreover, I don't perceive a significant quality difference between Evolution's and Pragmatic Play's games. This raises the question: if Pragmatic Play can make strides in the live casino market, isn't it possible for other competitors to emerge and capture their own share of the industry?
Another point of interest is that many analyses of Evolution fail to provide a convincing explanation of its competitive advantage in the live casino sector. Justifications often rely on statements like "they were the only player who could do this" or "they are the market leader," which don't adequately explain the company's moat.
I'm assuming you also read my response to Mujo_Investing on Pragmatic, so I won't repeat it here.
We can't know the financials of Pragmatic since they're private.
But, as I pointed out in my previous response, Evolution has significantly more studios and tables. As you said, EVO has 2 to 3 times more players. The way the contracts are structured, this means that Evolution likely makes a lot more money than Pragmatic. That's much more money to be spent on growth, R&D, advertising etc.
Secondly, the high number of players going through Evolution's games means that they have much more data. This can be used to determine player preferences, patterns, etc. Evolution will use that to determine what kinds of games players will like and what will do well.
At this point, I think the combination of much more money and much more data gives Evolution a significant advantage to competitors. Essentially, I think their head start is so big that it will be very hard for anyone to catch them. Give those resources to Todd Haushalter and I think you have a VERY hard company to beat.
The online casino market is growing at a rate high enough that there's room for competitors to capture their own share, but that doesn't mean they have to take share from Evolution to do so.
Hi - great piece TJ, as always. I read it some time ago and now I think this is a good time to have a look back - the stock has lost few bps since the publ. of the interim report Jan-June 2024 and was wondering whether you would have any comment on it? what triggered my attention is really the operating margin in slight decrease, the dvp in North America. Do you think the business somehow stagnates or that this is just noise and an even better entry point? Thx again for sharing your great insight!
Sorry to just be getting to this now. My advice is always to watch the business. Yes, there was a decline in margins, however there was a fairly large increase in headcount. Evolution has a pretty serious and long training process, so new staff won't be productive right away. This is a good thing long-term to me. It means they have demand they need to hire people to meet. Management called it "a period of consolidation after a period of growth" in the report.
Revenue continues to increase, so does net income. There has been the strike in Georgia, etc. so, again lots of noise in the stock price. In the mean time, the company keeps growing and management is buying back more and more shares.
My thesis and long-term view of the business hasn't changed since the article was published. I'd be perfectly happy if the market continues to dislike Evolution and management keeps buying back shares.
Everyone should question my research, that's why I make it public! The goal is to engage and improve so thanks for the comment.
There's always a balance of managing the length of a post and being comprehensive.
In the case of Pragmatic Play, I didn't mention them for a few reasons:
1. They're not public, so there's no financial data available.
2. Pragmatic is much more focused on RNG games, which I don't view as important for Evolution. I look at RNG and online slots as commodities. Evolution's advantages all lie in the live casino games.
3. Pragmatic does offer SOME live casino games, but it's a very limited number and as far as I know, they only have 1 studio (in Malta, I think?). Pragmatic's press releases on live casino are all about adding 10 or 12 tables at a time. Evolution has more than 1,600 active tables and 20 studios globally.
Thanks for the logical response - sorry if I came across rude or strong! My impression was Pragmatic is actually the leading competitor to EVO on live casino - even though they are much smaller still, whereas Playtech is antiquated/slow-moving.
I didn’t take it that way at all! The goal of writing in public is to have my ideas challenged. It’s actually hard to come up with a serious competitor for EVO in live casino. They have around 70% of the market. With that kind of head start, I think it’s going to be hard for anyone to catch them. That’s one of the reasons I like them and think the company will do well in the long run.
Great article, thanks. Can you please comment on the risk from the upcoming class action suits - both from revenue impact from loss of customers and penalties, if you've an estimate? https://next.io/news/investment/evolution-stock-crashes-after-report-rumours/
I think the class actions are short term noise, and more than priced into the stock.
As far as risk from Evolution providing games to aggregators, who in turn may provide them to customers in illegal markets - is it possible this is happening? Yes, it's possible.
Ultimately, the question here is if you trust Evolution's management. Personally, I do. They have ownership stakes in the company. They're buying back shares. They're building new studios and offices. Every customer Evolution sells to is licensed. Evolution says they do diligence beyond that - from the article you linked:
"Evolution supplies both licensed B2C casino operators, which then supply the games to players, and licensed B2B-actors, which then supply the games to B2C licensed operators, which in turn offer them to players.
“Evolution demands all B2B operators to perform a robust KYC on their B2C customers (our sublicensees) and Evolution performs an abridged due diligence on those sublicensees before approving them.”
Because we don't know how much of Evolution's revenue comes from aggregators, who those aggregators supply games to, etc. I think trying to estimate the impacts is a waste of time.
Evolution is far and away the leader in online live casino. Part of their advantage is the quality of their games and their size, but part of it is their reputation. I have a hard time believing they'd risk it by knowingly providing games to an aggregator who was operating illegally. Like I said, it could be happening. But I doubt Evolution's management is knowingly or actively participating in it. As long as that's the case, I think Evolution's risk is minimal.
Great TJ! Well done 👍
Thanks, glad you liked it!
Thank you for the excellent article! However, as Mujo_Investing mentioned, I believe Pragmatic Play is clearly a formidable competitor.
Upon examining online casino operator sites, I've noticed that games provided by Pragmatic Play, such as Mega Wheel and Sweet Bonanza Candyland, are attracting numerous players. Although Evolution's games typically have 2-3 times more players when I checked, Pragmatic Play's games demonstrate clear competitiveness and quality, suggesting they may be gaining ground.
Moreover, I don't perceive a significant quality difference between Evolution's and Pragmatic Play's games. This raises the question: if Pragmatic Play can make strides in the live casino market, isn't it possible for other competitors to emerge and capture their own share of the industry?
Another point of interest is that many analyses of Evolution fail to provide a convincing explanation of its competitive advantage in the live casino sector. Justifications often rely on statements like "they were the only player who could do this" or "they are the market leader," which don't adequately explain the company's moat.
I'm assuming you also read my response to Mujo_Investing on Pragmatic, so I won't repeat it here.
We can't know the financials of Pragmatic since they're private.
But, as I pointed out in my previous response, Evolution has significantly more studios and tables. As you said, EVO has 2 to 3 times more players. The way the contracts are structured, this means that Evolution likely makes a lot more money than Pragmatic. That's much more money to be spent on growth, R&D, advertising etc.
Secondly, the high number of players going through Evolution's games means that they have much more data. This can be used to determine player preferences, patterns, etc. Evolution will use that to determine what kinds of games players will like and what will do well.
At this point, I think the combination of much more money and much more data gives Evolution a significant advantage to competitors. Essentially, I think their head start is so big that it will be very hard for anyone to catch them. Give those resources to Todd Haushalter and I think you have a VERY hard company to beat.
The online casino market is growing at a rate high enough that there's room for competitors to capture their own share, but that doesn't mean they have to take share from Evolution to do so.
Hi - great piece TJ, as always. I read it some time ago and now I think this is a good time to have a look back - the stock has lost few bps since the publ. of the interim report Jan-June 2024 and was wondering whether you would have any comment on it? what triggered my attention is really the operating margin in slight decrease, the dvp in North America. Do you think the business somehow stagnates or that this is just noise and an even better entry point? Thx again for sharing your great insight!
Sorry to just be getting to this now. My advice is always to watch the business. Yes, there was a decline in margins, however there was a fairly large increase in headcount. Evolution has a pretty serious and long training process, so new staff won't be productive right away. This is a good thing long-term to me. It means they have demand they need to hire people to meet. Management called it "a period of consolidation after a period of growth" in the report.
Revenue continues to increase, so does net income. There has been the strike in Georgia, etc. so, again lots of noise in the stock price. In the mean time, the company keeps growing and management is buying back more and more shares.
My thesis and long-term view of the business hasn't changed since the article was published. I'd be perfectly happy if the market continues to dislike Evolution and management keeps buying back shares.
thanks a lot!
Unfortunately I question your research, given that you don't even mention Pragmatic in your competition....
Everyone should question my research, that's why I make it public! The goal is to engage and improve so thanks for the comment.
There's always a balance of managing the length of a post and being comprehensive.
In the case of Pragmatic Play, I didn't mention them for a few reasons:
1. They're not public, so there's no financial data available.
2. Pragmatic is much more focused on RNG games, which I don't view as important for Evolution. I look at RNG and online slots as commodities. Evolution's advantages all lie in the live casino games.
3. Pragmatic does offer SOME live casino games, but it's a very limited number and as far as I know, they only have 1 studio (in Malta, I think?). Pragmatic's press releases on live casino are all about adding 10 or 12 tables at a time. Evolution has more than 1,600 active tables and 20 studios globally.
Thanks for the logical response - sorry if I came across rude or strong! My impression was Pragmatic is actually the leading competitor to EVO on live casino - even though they are much smaller still, whereas Playtech is antiquated/slow-moving.
I didn’t take it that way at all! The goal of writing in public is to have my ideas challenged. It’s actually hard to come up with a serious competitor for EVO in live casino. They have around 70% of the market. With that kind of head start, I think it’s going to be hard for anyone to catch them. That’s one of the reasons I like them and think the company will do well in the long run.