Evolution Gaming: Can the High Returns Continue?

A fast-grower in an attractive niche, but the moat needs to be widened

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Jan 30, 2020
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Founded in 2006, Evolution Gaming (

OSTO:EVO, Financial) is the leading provider of live casino games for online gaming operators. The company employs a B2B2C partnership with customers, in which it takes care of the development, production and publishing of fully integrated solutions for operators, who in turn market the games to end-users.

Although domiciled in Sweden, the majority of the company’s employees are based in Latvia and Malta. We found that individual insiders account for over 30% of total shares outstanding, including 15.2% owned by the two founders, Jens von Bahr and Fredrik Osterberg and 16.5% owned by Richard Livingstone, an independent director. This ownership structure is favorable in terms of aligning management’s and minority shareholders’ interests, in our opinion.

We think that Evolution Gaming takes advantage of the asset-light operational model, along with its customer network of nearly 150 operators, to generate stable, small-ticket, repeatable cash flows from commission streams (for game wins) as well as monthly fees (for dedicated tables). As of the latest reported quarter, Europe in total contributed to 69% of the company’s total sales, followed by 15% from Asia and 6% from North America.

Checking the past financials, we have to admit that Evolution Gaming is a rare species that incorporates both exceptional returns and exceptional growth. According to the chart below, the business has delivered nearly 100% annual return on capital since it went public, compared favorably with our select peer group consisting of Playtech (

LSE:PTEC, Financial), International Game Technology (IGT, Financial), Churchill Downs (CHDN, Financial) and Scientific Games (SGMS, Financial).


At the same time, the company quadrupled its free cash flow per share within just a couple of years. Growths were mainly driven by international expansion (seven new regulated markets since 2014 and three in 2018 alone) and new products (16 new games since 2014 and nine in 2018 alone).

Since its establishment, Evolution Gaming has devoted itself solely to one business – live casino games. In a live casino game, live dealers and real-time feeds replicate the experience and feel of a real-world casino. This niche space has been gaining popularity, especially among high-end players using real money, and is expected to grow at high single digits through 2025. Evolution Gaming maintains a solid track record of “out-growing” the benchmark by a vast margin.

While we see a significant industry tailwind ahead, it is reasonable to expect competitions to heat up. Hot growth opportunities often attract chasing capitals. We noticed that many “traditional” providers have been launching and expanding their live casino offering. As the niche gets more crowded, it would be the moat that sheds light on the long-term value-generative growth. The management said the following in their 2018 annual report:

“Evolution operates in a competitive industry. Competition is expected to continue to intensify as new Live Casino providers enter the market and existing providers improve and expand their product and service offerings. If Evolution fails to compete effectively, it may result in a loss of customers and an inability to attract new customers, which could have a material adverse effect on the Group’s business, financial position and profit. The Company’s objective is to strengthen its leading market position and retain existing and attract new customers by developing its successful Live Casino platform further while focusing on a number of areas considered to be of strategic importance for continued growth.”

Unlike a “traditional” online casino (e.g. slot games), the live casino business requires not only technology capability but also operational excellence and a decent volume to be profitable. The volume factor is difficult for competitors to replicate in the short-to-mid-term. Evolution can effectively leverage its market-leading position, but there is no guarantee that its future games can harvest the same success as their precursors. A niche-market strategy can be competitively advantageous, while the durability in this regard can be unpredictable. While enjoying the tremendous increase in shareholder value for the time being, we do hope to see a more visible economic moat in the future.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Evolution Gaming.

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