sexta-feira, 26 de outubro de 2012

Opera Software Stock Analysis

In this post I intend to analise the Opera Software stock and in the process show how to execute a fundamentalist analysis of a publicly traded company. For the complete beginners, the fundamentalist analysis has nothing to do with the Taliban =) It simply means that we are analysing the stock for a long term investment by studying the historic of profits of the company as well as future perspectives and a number of risks as well as gain possibilities.

The key element of the fundamentalist analysis is the study of the balance sheet of the company. The value of a stock in the short term is completely unpredictable. One can only guess the stock movements in the short by studying the graphics and multiples, but in reality I'd say that this gives never more then a 66% certainty of the stock direction. But the same is not true about the long term value of a stock. The long term value of a stock goes hand in hand with the profits of the company, more specifically the profits per share and the P/L coefficient. To calculate the profits per share one must know the total profit and then divide it by the amount of stocks of the company. If the profit per share grows, then the value of the stock will also grow. If it decreases, the value of the stock will decrease.

If a company has a lot of profit, then it can invest, for example in buying production equipments and new factories if it is a industry, or it can buy other companies and grow this way, or it can distribute dividends to the shareholders. If the company has no profit, but instead if presents a loss one year after another without any years with profits, then it cannot do any of this things, and the company is almost completely without value. It has only the value that someday it might be profitable again: Never buy a company which does not have consistent profits.

The best way to know the possibility of the stock gaining or loosing value in the long term from the current price is the P/L indicator (P/L = Preço/Lucro in Portuguese, in english it is P/E = Price/Earnings with earnings meaning profit here, or C/Z in polish = cena / zysk). P/L is calculated by taking the price of the stock and dividing it by the profits per stock of the company. A P/L number of 10 is magical: it is a fair price for the stock if the market does not expect any gain in the profits of the company, except for keeping up with the inflation. If you see a company with a great potential of increasing the profits per share and with a P/L less than 10, then buy it. If the P/L is greater then 15 then the market sees a future of much greater profits than the current ones for the company. Either that, or the stock is overvalued and too expensive.

Also, besides the increase in the profits and growth of the company one should also look at dividends. In theory dividends are not absolutely necessary: if the company makes each time more profits then the stock value will grow anyway, even without dividends. Also, the stock price is diminished by the amount of the dividends when they are payed, but if those dividends were not a 1-time only profit which won't come again, then it quickly regains the previous price. I usually invest almost only in companies which pay good dividends, because they are a safety for the investor: Even if you get a bad luck and all kinds of things go wrong, the price of the stock goes extra low or whatever, if the stock still gives good dividends you can simply wait paitiently while you gain back your money from dividends.

Ok, so enough with theory, let's now get to work and analyse each kind of element involved in the investment in our specific case "Opera Software". I have listed bellow a number of things analysed and I have classified them as negative or positive and also included points by how much they are good or bad (1 for a minor issue, 2 for a major, 3 for a decisively important).

Solid growth in income, profits and profits per share +3

The balance sheet analysis is the corner stone of the fundamentalist analysis. Never start analysing a company before obtaining an organized table showing the data bellow. For Brazilian stocks one can simply look up the already nicely organized in the website Basttos, but for Opera I had to read the various anual reports of the company. It is usually very easy to find the anual reports, just go to the main company website, in our case and click in Company -> Investor Relations -> Financial Reports. Or similar names. In our case we will land in the page which has the reports. For 2012 I utilized the data up to the 3rd quarter and duplicated the 3rd quarter values, which might be too optimist, since it was a very good quarter in terms of profits. But on the other hand the expectations from investors which I saw in Businessweek are even higher! Anyway, here is my table of data:

Year Patrimony (MNOK) Income
Profit (excl. taxes) Margin (%) Cash Debts # of Stocks (millions) Stock Price
P/L Profit per share (NOK)
2007 613,73 315,47 12,47 3,95 466,81 0 118,28 13,7 129,97 0,11
2008 803,29 497,11 87,7 17,64 563,55 0 119,91 15,08 20,61 0,73
2009 821,72 612,74 28,46 4,64 546,5 0 118,66 25,5 106,33 0,26
2010 954,17 692,24 25,81 3,73 507,4 0 118,95 25 115,21 0,19
2011 991,6 897,38 142,05 15,83 498,2 0 119 27,25 22,83 1,19
2012 1382,25 1204,41 152,76 12,68 353,4 0 119,6 33 25,84 0,99

For the stock price I utilized an average of 1st May and 1st November, except in 2012 which is 1st November, because it is near our current date today.

So, if we analyse the data above we can see that the income is growing immensely, at a rate of 19% and the profits at an average rate of 100%! On the other hand there are significant factors which make this 100% increase in profits much less spectacular than it would otherwise be:

1) The P/L factor in years of lower profits (10 to 30 million NOK) was immense, around 110. I never saw such a huge P/L factor in my life. It means that the market was already expecting this huge increase in profits. Now the P/L is 25, which is much more normal, although still very high.

2) It would be insane to assume that profits will keep growing at 100% per year. I think that 19% might be a good guess, which is the same as the increase in income.

Still, even despite those 2 warnings which I noted, the balance sheet from Opera is extremely solid. It has zero debt! A constantly growing income and profits and the number of stock is not changing, which means that the company profits are not being dilluded.

Zero Debt +1

As previously seen in the balance sheet: Opera has zero debt, and this is an important advantage as there is no risk of the debt eating our profits.

Very high P/L -2

25 is a huge value for P/L, which means that at the current price of 33 NOK the stock is very expensive, unless the profits in the next years are much higher. Like twice as much higher. Compare with the P/L of competitors such as Google 17, Apple 14 and Microsoft 10. The lower the cheaper the stock is, and those big 3 have much lower P/L factors. Ok, we could give a break for the high P/L because the company is growing fast, but still...

Stock negotiated in Norwegian Krowns -3

This is a much more important problem than it might seem at a first moment. Having our stock negotiated in another country and in a currency in which we do not have a bank account causes all kinds of inefficiencies. For example, when receiving dividends and also if we sell our stock and wish to receive our money, then we will need to pay for an international transaction and again we will loose some money in the conversion. Besides that, there is also the currency exchange risk: right now NOK / PLN seems to be near its historic high (0,5572 now vs a nearby historic high of 0,5912 in Dez 2011 and in 1st May 2011 it was 0,5058). So I think that there is a risk that it could go down 10% in the next years. This problem would be much smaller if the currency in question would be euros, since I am interrested in euros and I have a bank account in euros, then only the international transaction cost would be of worry. On the good side I did a small research and NOK is likely to remain strong in the next 10 years at least, because NOK is pushed up by oil exports from norway, and those won't decrease in the next 10 years and also because the inflation in Norway was very small this year. Differencies between exchange rates are pushed by exports as well as by inflation differences. Currencies with higher inflation tend to loose value. Currencies of countries with more export than imports tend to win value.

Note that not for every currency this is a problem. I am interrested in euros, reais and zlotes, so if Opera was listed in euros I would have given -10% instead of -30%, because I am interrested in euros and I have a bank account in euros. But I am absolutely not interrested in NOKs...

See the graphic of PLN / NOK:,18909,828,0,1109,profile-waluta-online

Good Governance, amount of stocks is not changing +1

Putting your money as a minoritary investor in a company means a almost blind trust in the people managing the company. The majoritary owner can do anything he wants with the company, so he could together with the directors get all the money and leave the company without profits which must be shared with minoritary stock holders. There are many cases like this. Sometimes there is even fraud, like in the "Banco Cruzeiro do Sul", where the owner frauded statements saying that the company is doing great while he stole all the money. Or else like Enron frauded their balance sheet to increase the stock price and then sell their shares. And not only private owners do that. Petrobras had huge profits, but 51% of the voting shares are owned by the government, so it found ways to get all the profits to itself, force the company to sell fuel at prices bellow what it paid for it and other actions which turned it into a deficitary company. In all of those cases the minoritary can have immense loses. And in the case of Opera Software I think that the majority owners can be blindly trusted. I see no reason to doubt them and the mere fact that profits are obtained year after year already shows how they are reliable.

Almost no dividends -2

The value of this changes from investor to investor, but I personally give a great value in dividends, and Opera this year paied 0,2 NOK in dividends which is a mere 0,6%, almost nothing. Many companies pay 5% or more, although it is true that in the technology field things evolve so fast that it might not be possible to pay high dividends without getting behind.

Very successful acquisitions +2

If Opera Software has a lot of profits and it gives almost no dividends, then what is it doing with the money? It could buy government bonds, or leave them in their bank account. But it does better then that. Opera has been using the profits to make acquisitions, but the really important thing here is that those acquisitions are going extremely well. In 2010 Opera bought AdMarvel for 8 million USD + 15 million USD if it brought a lot of earnings. And due to those acquisitions the mobile advertisement section of Opera is already receiving around 14 million USD of income per quarter. This is huge, around 25% of the total income of Opera.

Very good sector and future perspectives +1

The internet, desktop browsers, mobile browsers and mobile advertisement are all great sectors, which are growing immensely everywhere in the world. There do are some challanges, like the fall of low-end phones where Opera Mini is king and the increase in Smartphones which already come with a decent browser. The risk of verticalization of companies like Apple, Google and Microsoft leaving Opera out, and the desktop competition comming from Google Chrome, but despite all of that, I still think that Opera is in a good position and has good directors which might change its direction if necessary.

Possibility of another acquisition rumor or fact +1

Earlier this year a rumour that Facebook would buy Opera for 55 NOK per share brought the price up to nearly 50 NOK... and comparing with the current price of 33 NOK it looks an interresting thing to consider: That this kind of interrest might come back in the future.

Graphic Analysis

Looking at the graphic I give a neutral position for buying now. I think it can go lower in the next months as the stock is clearly in a downwards direction after the big hipe of the facebook rumour. There is room for going both up and down in the next 12 months in my oppinion.

Very high taxes in Norway -1

Norway has a corporate tax of 28% and Opera Software payed an effective 32% in 2011. That's a huge amount of taxes, the more normal amount is 20% for corporate tax around the world.

Total note: +1

Ok, so I finish here. This was mostly an exercise to better know the possibilities of Opera Software and to keep here documented the process of analysing a stock.

In the past I considered buying Opera stocks at various moments and I think that I tought like this:

*1st May 2010 Price 20 NOK I was not yet working in Opera, had just arrived in Poland
*1st November 2010 Price 30 NOK I considered correctly as too high, waited to go back to 20
*1st May 2011 Price 29 NOK I considered correctly as too high, waited to go back to 20
*1st November 2011 Price 25 NOK I considered still as too high, and I was upset that the PLNs had just lost a lot of value to NOKs, but I think that I did not pay enough attention to the huge increase in the profits in 2011 Q3, as at that time I did not know of the relation between stock value and the company profits. So I was wrong and should habe bought at this moment =)
*1st May 2012 Price 40 NOK I correctly considered too high
*1st November 2012 Price 33 NOK Here we are =) What to do? This is the million dollar question...

Disclaimer: I have utilized absolutely absolutely no knowledge as a company employee to make this analysis. I have only utilized data publicly available for everyone. I am not giving any kind of tip here for someone to buy or sell stocks and I have no formal training in stock analysis. Anyone buying or selling does so in his own responsability. I collected data from the following places:

Profit 1 year
Profit 4 years
History of Dividends
Forum & Patrimony
NOK / PLN,18909,828,0,1109,profile-waluta-online
Financial Report

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