How the numbers looked when we started looking into Evolution

Note: The stock price is in SEK in this article, while the earnings are in Euros.

When we first bought shares in the Swedish live casino company Evolution in 2019, the story first started with our purchase of NetEnt. We bought shares in NetEnt in October 2018 after the price had fallen a lot, and the business seemed to be doing well still, in our opinion. As you may recall from our earlier blog article, we soon discovered the potential of Evolution Gaming Group Ab, and we also decided to buy EVO in February 2019.

The numbers such as revenue growth and earnings per share growth for EVO were as follows.

The numbers of Evolution looked quite appealing. Revenues were growing really fast. And the EPS, earnings per share had increased close to 10x from year 2012 to the end of 2018. Those were some of the numbers we had available when we started investing.

And when we checked the share price it looked something like this back in the start of 2019.

(The share price in the picture was actually about 1/6 of what you see in the graph. The numbers are adjusted for stock splits.)

The share price had more than doubled over the past two years, and to us it actually looked a bit expensive to buy in at that time. Little did we know how much the company was yet to be growing. Below you see the progress for the two following years.

How it developed the two following years...

As you can see the earnings per share tripled in just two years! And as you might know already, the share price went nuts. From the 100's to more than 800 at the end of 2020, and now, in 2021, we are close to 1500.

Were the shares really cheap back in 2019?

When looking in hindsight, a share price of close to 140 during our purchase in 2019 was cheap. But we weren't sure of how much upside we would have in a short time. The P/E ratio was between 25 and 30 when we bought it actually, and to a classical value investor, that price might have turned you down! Nevertheless, we thought, if the company's sales and earnings could grow as much as we thought they could, we were getting a wonderful company at a fair price.

The latest numbers

Today we see Evolution trading around 1500 SEK, while the earnings for 2020 were close to EUR 1.55 per share. That's a P/E ratio of about 97 if you count "old earnings".

The latest quarter report shows that earnings per share climbed to EUR 0.68 for Apr-Jun 2021. If we assume another 50% growth or so for 2022, then the forward 2022 P/E ratio is "only" about 37. 

The price may seem high now. But it depends. Can it grow another year of close to 75% like it did from Q2-2020 to Q2-2021?  

We don't know how much, but we are pretty confident that the company has a long way of growing still. As far as we can see, it has only just begun to grow in North America, and it has a long way ahead to grow from relative small numbers still in Asia. That's our opinion, and not investment advice!

It is worth of note, however, that in 2020 the earnings of their new subsidary, NetEnt, was included in Q4-2020.

The lesson

Buying a high-growing company at 25-30 P/E when it will continue grow earnings wildly can indeed be a bargain. 

When we bought shares in the company we had an entry yield of about 3-4% (~5 SEK earnings compared to a price of 140 SEK). Two and a half years later the earnings are within reach of 20 SEK per share. Compare that to our entry price of 140 we have a more longer term yield on entry at ca 14% which probably will grow more and more (20 SEK / 140 SEK).

In order to invest and not speculate you should first really understand the company, and figure out how its competitive position will be as far out in the future as you can.