We Study Billionaires - The Investor’s Podcast Network - TIP604: Best Quality Idea Q1 2024 w/ Clay Finck & Kyle Grieve

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by my co-host, Kyle Greve, to kick off a new series titled Best Quality Ideas, where we discuss a quality stock we like for this quarter. To kick off this series, we'll be covering Evolution A-B. Evolution develops live casino games, which are played all around the globe. What I personally like about Evolution is that they're really capitalizing on this trend, from land-based casinos to online casinos as more and more markets establish a range of regulatory framework. Evolution is well known in the world of quality investors, as the stock has

Starting point is 00:00:35 compounded by over 60% per year over the past five years, and it seems to still have a long runway for growth ahead. In this episode, Kyle and I cover what evolution's business model is and how they make money, how the quantitative metrics look for evolution historically, the massive tailwinds at play in their industry, the difference between a regulated and unregulated market, What Geographies Evolution has the largest presence in? The competitive landscape and evolution's moat? An overview of Evolution's management team and recent acquisitions. The valuation and the most important KPIs for investors to track, and so much more.

Starting point is 00:01:11 Before we dive in, I've had many people reach out to me about the events TIP is hosting during the weekend of the Berkshire Hathaway meeting in Omaha. We'll be hosting live social events for members of our TIP Mastermind Community, which is a paid group our most passionate audience members are a part of, whom we're also hosting a more private, exclusive event known as the Berkshire Summit. The Berkshire Summit is a rare opportunity to spend an evening with me, William Green, and an amazing group of elite all-star investors, some of which have been very popular guests on the Richer Wiser-Happier Podcast.

Starting point is 00:01:43 We only have a few more spots left for the summit, and you can learn more by staying until the end of this episode where I'm going to go into more detail or simply clicking the link in the show notes. With that, I bring you today's episode with Kyle Greve on Evolution, A.B. You are listening to The Investors Podcast. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your hosts, Clay Fink and Kyle Greve. Welcome to the Investors podcast. I'm your host, Clay Fink, and today is a great day because we

Starting point is 00:02:31 have the start of a new series teed up for the listeners as I'm joined by my co-host Kyle Greve. Kyle, how are you doing today? I'm doing great. Thank you for asking. So today we're going to be starting what we're calling our best quality idea series. It's very exciting. This is where Kyle and I are going to be talking about a stock that we believe is a quality name and hopefully is trading at a fair price, but sometimes that can be difficult to find depending on market conditions and the companies that we're looking at on our watch list and such and whatever's in our portfolios. So in this episode, we're going to be talking about Evolution A-B, which is a company based out of Sweden. And for anyone that's in the circles that Kyle and I venture

Starting point is 00:03:12 in on Twitter and such, you may be familiar with this name. And I'm sure many other listeners might not be as familiar. And that's absolutely okay too. I think you'll find this company quite interesting. And this episode is going to be similar to the previous conversation Kyle and I had on the show where we discussed Dino Polska. We'll be sure to get that conversation linked in the show notes. That was episode 587 on the podcast feed. And before we get started, I think it's important to mention that Kyle and I both own shares in Evolution A-B. We're going to be referring to this as evolution during this conversation. I acquired my shares in 2023 around an average price of 1,084 Swedish Kroner. At the time of the recording, shares are treating around 1,210 Swedish Kroner, so slightly above

Starting point is 00:04:01 the price I got in. And for those who aren't familiar with the Swedish Kroner, it's about a 10 to one currency conversion, one U.S. dollars, around 10.4 Swedish Kroner. So you just divide any Swedish Kroner number by 10 to get a rough estimate of U.S. dollars. And we have a rule here at TIP, where we can't buy or sell shares for two weeks after the episode's release. And similar to D&O, I don't plan to sell any shares, hopefully over the next five plus years. Unless my investment thesis gets busted, I plan to hold this stock for the long run essentially. So, Kyle, would you mind confirming that you also own shares and your average price, if you happen to have that pulled up? Yeah, absolutely. So yeah, I do own shares. I bought my first shares, I believe, in July of 2022.

Starting point is 00:04:47 So my average cost basis is 85 USD. So I have the ADR, the ticker, EVV-T-Y, and this comes to around the 900 SEK. And of course, as with all stocks we talk about on the show, none of this is intended to be a buy or sell recommendation. And certainly when it comes to evolution, Kyle and I have a bias because we own shares. So please do your own research. And even if you're not interested in this type of company,

Starting point is 00:05:13 I think it's super helpful just to tune into how people sort of, you know, think about companies. What do they look for? What are some of the things they like? So I think a lot of listeners just really enjoyed that as well. So the first question I had for you, Kyle, was how about we talk about how you discovered evolution in the first place? Because, you know, it's based out of Sweden, you know, not a market that a lot of people are familiar with. And what did the research process look like after you discovered it? Yeah. So going back, I think the very first time I ever saw was just people mentioning it based off of looking at Chris Mayer's filings and seeing that he owned it. And so then I started digging into it and looking just at the numbers and they were. very outstanding. So I reached out to some people. I reached out to Chris because I DM Chris quite often and he's obviously a pretty big friend of the show as well. And he told me a lot about it. He helped me

Starting point is 00:06:02 a lot with questions I had. And then another friend of the show compounding quality also, he's a huge fan and I think he's an owner as well. So I DM'd him and I conversed with him a ton and asked him again, the same types of questions trying to figure out, you know, how they're modeling their what is valuation and you know, trying to find out more about the mode and any type of interesting tidbits of information I could. And then yeah, so basically once I found it, there was also tons of other really interesting people on Twitter who were talking about it and I reached out to them also in DMs. A lot of these people that you don't think would talk to you, they will because everyone wants to talk about their stocks that they own and share because it's good. It helps you sharpen

Starting point is 00:06:40 your own skills. And then how about the research process from there? What were some of the key sort of resources to figuring out, you know, the company's business model and really understand how evolution fits into the big picture. A couple of the key resources that I liked. So there was, I know in the U.S., I can't recall the exact name of it, but they publicized like all of their gambling regulations, like there's boards and stuff like that. And so you can get really, really detailed information like specific to states, specific to the whole country. So that was really helpful because I did do, I wrote a report for my sub stock, which unfortunately doesn't exist anymore, about their total available market in the U.S. and in Asia looking specifically. And yeah, you can get

Starting point is 00:07:25 really good data for the U.S. I think they do it like on a monthly basis. Like, especially New Jersey. New Jersey just, they're really ahead of the game. You can see what's going on there and it's growing at very high rates like all the time. So that's one really good resource. Another resource I use was just looking at other analysts. I mean, I generally like smaller businesses that have minimal analysts, but this is a business that is, you know, its biggest one by far by market cap in my portfolio. So there are other analysts and, you know, there are some other analysts doing some actually pretty good work. So, you know, you can use them to look at information about competitors, trying to find competitors, try to find out what competitors are doing, looking at

Starting point is 00:08:02 the numbers and profit margins and the moats of competitors. So that's another really good resource for finding out more. And then, you know, evolution and it seems like a lot of just Swedish companies in general have really good disclosure. So if you just look on their website, I mean, they have so much good information and they do a really good job of telling you what the business does, how it runs, and we'll get into that later and more detail. So I won't go into that now. But it's really impressive. So if you want to know more information about the company, you can just head straight to the source and look at the company documentation. They have a lot of really good things there. Yeah, I think you make some really great points there where the company

Starting point is 00:08:38 has really good disclosures. And there's also really good data that you find from other resources. is I think one of the things that stands out to me with evolution is, yeah, the New Jersey research sort of points to this market is a growing market. And I think you find that, especially with what you pointed out in the article you wrote up on their total addressable market, just this market is global and it is growing. And it's providing a lot of tailwinds for evolution. So I think the next place to go here is what the heck does evolution do? Yeah, absolutely.

Starting point is 00:09:08 So evolution, when people think about casino stocks, Evolution is not really, doesn't really fit into that because it's not a traditional casino. You know, they don't need to have these gigantic buildings that cost a lot of money and own all these, you know, and deal with regulators. I mean, they do have to in their own way, but luckily, they have all sorts of little shortcuts that make the business just a better model. So basically what they do is they create, operate and run online casino games. So I like to think of it in a couple different ways.

Starting point is 00:09:36 They have RNG, which is just random number generator. So that's just like slots, basically. You know, if you imagine yourself in a physical casino and there's just people putting a lever down or hitting a button on a screen and then just a bunch of numbers generated on a screen, that's what RNG is. So, you know, I personally don't find that part interesting, but a lot of people do and they make a little bit of money from that, but it's not definitely not their main segment. So online live is actually their main segment. And I like to think of it as kind of two segments. So one is online live kind of like you would think of in a normal casino. So like, you know, roulette, blackjack, games like that.

Starting point is 00:10:11 where you go, there's a dealer and, you know, there's people standing around the table or sitting and having a good time or not having a good time. And then so they basically have these giant studios where they'll basically record one dealer working with a whole bunch of people. And then they've kind of, they're very innovative companies. So one of their biggest innovations is now these game shows. So these game shows, their biggest most popular one is called Crazy Time. And you have a game show host and there's a lot of stuff going on. Like honestly, I've watched some of the videos. And I mean, I would probably just need to play it to actually understand the rules of the game. But it looks like the people playing are having a lot of fun.

Starting point is 00:10:48 And the hosts are always really, really well engaged. And so, yeah, so basically those are kind of their general, the way they operate. And so yeah, so like I was talking about with these studios. So you can kind of think of a studio almost like a movie studio. I think that's probably where they came up with the idea. So in Europe, they have a whole bunch of these studios. And the thing that's interesting in Europe specifically is that they can have one studio, I think they have their biggest one is in Riga, which is in Malta, I believe.

Starting point is 00:11:17 And that one studio can have hosting games like all over Europe and I know also in parts in Asia as well. So that makes things really easy. And then when you compare that to North America, things change. So in the US especially, the studio has to be in the state where the users are playing the game. So basically what that means is they've had to partner up with casinos specifically in the US. then they basically reserve a part of the casino for their studios.

Starting point is 00:11:44 And that allows the regulators to come in and make sure everything is running as it should be. But the economics, you know, it changed a little bit because if you can have one centralized studio blasting out video to multiple countries, that's going to be a lot better in terms of margins and scale than having to do it in each location. But it's working really well for evolution. Yeah, the live casino is really, really important to understand about this business, where you're getting online and you're seeing a dealer. I always think of Blackjack because it's a game.

Starting point is 00:12:13 I personally enjoy playing, but there's so many types of games. Over the years, they've developed so many games. I believe it was 2023. They developed over 100. And five plus years ago, they were developing something like less than 20 or less than 10. So they've really scaled up the number of games they're releasing. That leads to users joining one game and then finding another game. And there's a lot of intersection that goes in with this.

Starting point is 00:12:37 And I think the major sort of theme to understand with this business is the shift from physical and person to digital. So we're going to be talking about this shift throughout the episode, but I think that's sort of the key theme sort of playing out here, where these land-based casinos, their businesses are really stagnating, not really growing at all. Most of them probably are in the decline, but this online portion is really something that's growing.

Starting point is 00:13:02 In evolution, in the live casino aspect, is what they're really the big leader in and where their dominant position is at. And I think another interesting aspect of this is you're getting online and you're playing Blackjack or whatever game and you see a person right there. It's not like the random number generator games where you're just clicking a button and it's just telling you if you want or lost or not. You know, you're seeing a person and there's some sort of interaction that's happening there.

Starting point is 00:13:30 Absolutely. Yeah. And I think that there's a degree of trust when you have the actual dealer there. And that's like a big area of their game that they've tried to develop is that degree of trust with their customers. And I know it's been, it's been hard because, you know, things happen, right? Like I remember Todd House Helter talking, and we talk about him talking about, you know, balls falling off the table or, you know, dropping a card on the ground. And they have all their own little standard operating procedures for dealing with this and making sure that, you know,

Starting point is 00:13:59 people aren't cheating or people aren't accusing them of cheating. And they are accused of them. I mean, any casino, unfortunately, gets that. But yeah, they're doing everything right in the eyes of regulators. And as with many digital new age economy businesses, the economics can be quite attractive, especially when they're strong moats at play. So talk about the economics of evolution and how exactly they make money then. Essentially, you can think of it somehow that they're kind of a middleman. So obviously there's a casino operator.

Starting point is 00:14:28 So a casino operator that a lot of people would probably know would be like AAA casinos or poker stars. So let's say someone goes on and wants to play one of the. their game show games. So they'll go on, play a game show game. They'll win or lose money, whatever. And then so basically the money that they lose to the house goes to the house, which would be in this case, let's say AAA casinos. And then AAA casinos basically would pay out. They basically have a variable fee and a fixed fee. So the variable fee will be a percentage of the gross gaming revenue, which is just GGR. And then they have a fixed fee, which is just based on, you know,

Starting point is 00:15:00 whatever the deal is that they have with evolution. And evolution also has some interesting things that they do. So they have games where it'll be branded as. as, you know, Evolution's game or as one of their subsidiaries. But then they also offer the ability to have branding of the operator. So, you know, it might be a game that's hosted by Evolution, but the dealers and the game boards they're playing all have AAA poker on it. So that's kind of an interesting little way, extra way for them to make money and make it so that it's branded specifically for whoever the operator is.

Starting point is 00:15:28 So yeah, and that's basically, yeah. So they just get a fixed fee and a percentage of the gross gaming revenue. And they just basically make sure that their games are all running in tip-top condition. And as long as that's happening and as long as people are enjoying their games and they can just keep on going. And then an additional thing that Clay actually already mentioned was how they have multiple games, right? So with some smaller operators might only have one or two games. So that's great. Maybe they have one or two games.

Starting point is 00:15:53 But Evolution has this thing called one stop shop where essentially you can go and it integrates all sorts of different games into one application that the operator can then use and show to their players. So that it's really cool because it allows people to not only stay on their platform, but it also allows people to stay on evolution's platform and get used to more and more with their games and try out different things. And yeah, so like you are also talking about with entertainment, I was talking to Data Aeson, and he actually said that he calls it uncertainty entertainment.

Starting point is 00:16:21 And I really like that. And it is, right? Like you can think of Netflix, I guess, is somewhat like that. I mean, it is certain that you're just watching a movie, right? But, you know, sports betting, that's definitely uncertainty or, you know, betting on horses and then cards and all sorts. There's all sorts of things. So yeah, it's a big market that they're trying to penetrate,

Starting point is 00:16:40 but they're doing a really good job of it so far. You recently did a presentation with our mastermind community that discussed your portfolio, how your portfolio performed throughout 2023. And you talked about how you split your portfolio up into what you call stalwarts and then the nano or microcaps. Your portfolio had a return of 18.6% in 2023, so a pretty good year for you.

Starting point is 00:17:04 And that's despite evolution being, your largest position. And it's been a choppy year for evolution, but the business results have been quite good. I think you and I would agree on. And for your stalwart's in your portfolio, you seem to have, for most of them, you have some quantitative metrics that you want to hit, you know, just things like return on invested capital, revenue and earnings growth, you know, along a track record of being a successful business. But then for your nanocaps or your microcaps, these tend to not screen well. And, you know, they, from a quantitative perspective, they tend to look much different. They're sort of on the cusp of an inflection point. Maybe they're just becoming

Starting point is 00:17:41 profitable or they just became profitable. And these typically are misunderstood by the market. So it's sort of just a different way to invest really, where you're looking for something that's undervalued and trying to take advantage of that. So how about you paint a picture of what you're seeing quantitatively for evolution to help the listeners get a sense of the quality of this business? First thing I really love to see in any business I own is high insider ownership, right? Because you want people managing the money who are hopefully aligned with you as a shareholder because you're not running the business. So generally speaking with larger and larger businesses, they've been around a lot. They've had to get financing. So, you know, the insider ownership

Starting point is 00:18:20 generally for a, you know, a company that's worth billions of dollars isn't going to be super high. But evolution is around 18%, which I think is excellent. Usually I prefer like 10%. So they're definitely doing well on that end. And then high returns on investment capital, like you mentioned, I mean, that's honestly probably one of the most important numbers that you can possibly have. It's a business that it was well above 50% for a long period of time. And then they kind of went on this acquisition spree. And I've gotten a lot of questions about this that, you know, oh, why did it drop a lot? And there was one of their acquisitions, they ended up using a lot of their stock to pay for. And that increased their equity base, which is why it's their return on investor capital has dropped. But even if you look at it,

Starting point is 00:18:58 It's going up linearly the last few years since they've made those acquisitions and it's still above 20%. So I'm happy with it on that end. And the margins, I mean, their margins are insane. I mean, to be fair, though, I mean, if you are comparing it to other eye gaming businesses, it's just the industry has insane margins. So you can see that as being good as a shareholder, but you can also see it being bad because it's also going to attract a lot of competition, which it is. But evolution has some unique characteristics that are protecting it, which we'll go over it in the future. But yeah, I mean, EBITDum, Margie. margin, 68%, operating margins, 63%, net margins of 58%, free cashful margin, 62%. I mean, that's just, it's hard to find businesses that can do that for a long period of time. And then on top of that, the thing that's really interesting is if you go back 10 years, all these margins have doubled. Like, it's insane how much margins or how much more money this business is just is making every single year.

Starting point is 00:19:51 You know, I'm not going to assume that these are just going to keep moving up. Everything's kind of slowing down at this point as it gets more mature, but their ability to maintain their margins right now seem pretty high for quite a few years into the future. And then I like looking at businesses that are growing. So, you know, I'm looking at things like growing revenue, net income per share earnings. So if you look at the 10-year compounded annual gains in these numbers, so revenue is 47 percent, net income 66 percent, and earnings per share at 63 then you want obviously a business that's not going to dilute shareholders. And they've done a pretty good job with that. I mean, we'll be getting into their acquisition later on the

Starting point is 00:20:27 episode, but if you look back over 10 years, they've diluted by about 2% per year. And now they have this buyback program going on. So I'm hoping that that becomes a regular part of the business. I think a lot of shareholders, Clay probably would agree with me here. He'd like to see that. And then debt, I mean, obviously, if we can find a business that can just operate and hopefully grow with zero debt or equity financing, that'll be perfect. And evolution doesn't need anything from anyone. So that's awesome. Now, I personally, I don't invest for dividend income, but they do have a dividend. It's about a 50% payout ratio. And the dividend's been growing at 50% compounded annually. So if you do like dividends, this might be a name that interests you. Yeah, to paint some

Starting point is 00:21:07 color around the dividend, it seems like they tell shareholders that they want to pay out 50% of their profits as dividends. And since the business is growing, it's sort of a trailing. Their payout ratio might drop below that 50% mark just because the business itself is growing. But when they look back, they're trying to pay out half those profits as dividends. So yeah, it is a dividend payer, which typically isn't something Kyle and I are looking for. And to paint some more color around the size of this business, they report their financials, I believe in euros. I see on Morningstar here, their revenues for 2022 were just under 1.5 billion euros. And then I'm switching the lens to US dollars. The market caps around 24 billion US dollars.

Starting point is 00:21:50 And to be fair, their growth has been, you know, just simply amazing over the last decade. but as you mentioned, it has slowed down drastically as they've scaled up. For example, 2020 revenue grew by 53%, 2021, revenue grew by 90%. 2022, you know, grew again by 36% after that huge boost after COVID. And then it seems that they've started to run into some growing pains, and they've talked about this in the reports. Their revenue over the first nine months of 2023, which is the most recent data we have at the time of recording,

Starting point is 00:22:22 That revenue was up 26% year over year, which is still pretty dang good. And the most recent quarter had revenue growth of 19% and then profit growth of 23%. And these growth levels are still very impressive to me. And you mentioned the margin expansion over time. And I think that's still sort of an indicator of a strong moat of if their margins are continuing able to increase, then they have strong pricing power and they have strong business economics within their business. And I was reading one of their recent reports and they talked about how there's more demand for their products than they're currently able to fill. You talked about

Starting point is 00:22:59 the live casino aspect where they need to have dealers in place to service all these users. And they're just like, you know, we can't expand to me all the demand that that's out there. And that really tells me that they're certainly operating from a position of strength right now. And, you know, having more demand than you can handle is certainly a good problem to have. And, and, you know, really gives them, I think, a lot of pricing power as well and just points to the strength of this business. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:28:00 important to the business. Because, yeah, I mean, really, like, you know, it's a pretty nice problem to have where it's like, oh, well, we can't hire enough people or open enough studios to meet the demand. So I think they'll get moving on that pretty quickly, though. And they don't. have a ton of, you know, turnover that should be of concern at upper management. But when you go down to the dealer level, they're going to have a lot of turnover where people just sort of get burnt out dealing. And, you know, that's certainly understandable. It's not a job that a lot of people are looking to have as a career. But there's a lot of younger people that can earn a decent income by doing something like this. So that's just something that's just sort of a growing pain for evolution.

Starting point is 00:28:38 Just how are they going to be able to hire all these dealers to run their tables? And I wanted to mention this research that was done by Alta Fox. You had mentioned this to me when you had done research on it. They had a report on Evolution, which I'll be sure to link in the show notes, and they list a number of tailwinds that have led to the growth of the live casino market. And I think a lot of it just made total sense that I just wanted to tie in here. Looking at Evolution's 2022 annual report, they cite a statistic that from 2018 through 2022, the live casino industry as a whole had grown by 21.5% per year. And then the land-based casino market had shrunk by 4.7% per year. Turning back to the Alta Fox research, the first tailwind they mentioned to why this growth has been

Starting point is 00:29:23 so strong in the live casino space is lower latency internet and broadband. So as technology continues to get better and better related to the internet, then this creates a better user experience within these live casinos. And then this also relates to better camera technology, better or streaming technology. There's that saying that software is eating the world. So as these products and services get better and better related to the internet, then businesses around that space are going to continue to benefit from that. And then another tailwind we're going to be talking about today is just the regulation of

Starting point is 00:29:56 eye gaming. And that's globally. More and more countries are adding more regulations and making it more of a place where businesses know what the regulations are going to be because there's sort of these gray area markets where businesses don't really know what direction the country's going to head in terms of regulation. So evolution is really in talks with regulators all around the world. And that may be with countries that already have a framework in place, or it may be something like the US where only five states have approved live casino and more are looking to get into that. And then Europe

Starting point is 00:30:29 is actually evolution's most mature market. So Europe is a case where most countries have regulated markets and evolution has an established position there and they are growing as fast in Europe as they are in some of the other areas. As more countries put regulations in place than this, I believe is going to be a really strong positive trend for evolution's business. And I'm not sure about the people you're connected with, Kyle, but so many people my age are really interested in sports betting. And Alta Fox lists one benefit for evolution is the ability of these casino operators to be able to cross-sell sports betting with their other offerings, live casino being one of them. So, you know, there's this big trend, at least from what I'm

Starting point is 00:31:16 seeing, to people getting more and more interested in sports betting. And then, hey, they go out and discover some of the things that evolution offers, especially with releasing over 100 games in 2023. Like, there's plenty of things for people to get interested in discover and new ways to gamble, which we'll also be touching on today. I personally don't gamble too often, but when I'm on a trip with friends. We'll go to a land-based casino from time to time. And honestly, I think it's important to mention that I just don't have like a super pleasant experience going to a lot of casinos. A lot of casinos here in the U.S. allow smoking. A lot of times you're surrounded by people you'd probably rather not be around. And when you think about having the ability to play blackjack

Starting point is 00:31:57 or whatever online casino game in the comfort of your own home, you know, I think that's a pretty strong value proposition. And I think there's also something to be said about the experience of actually being there in person, you know, seeing the dealer face to face. So there's definitely some give and take when it comes to this trend to online live casinos. And as I mentioned, seeing the dealer, having people around you, having that in person experience. But I think in the end, overall, it's definitely a win-win for evolution that, you know, this trend to online gambling is obviously going to be really important for them. So I don't know if you have anything to add related to these tailwinds that evolution is seeing. Yeah, no. I'm not.

Starting point is 00:32:36 I tend to agree with you. Me and my friends do like a little bit of sports betting. It's probably by far the most. I haven't been in a casino, a live casino for many years. And yeah, when I would go, it's full of people that are the most interesting. Luckily in Canada, you can't smoke in them. So it's a lot more manageable. But yeah, I mean, it's a lot of people who are sleepy and inebriated.

Starting point is 00:32:59 Not exactly the people that you want to spend too much time around. So yeah, that definitely is a big tail when that you can kind of get the similar experience. but from your comfort of your own home. Yeah. I forgot to also mention that most casinos aren't going to be like in your backyard. They're going to be 30 minutes or an hour away and it's not going to be super easy to get to. So it's quite a trip to go and do that. And then online, it's just like click of a couple buttons you're on and you could be, you know,

Starting point is 00:33:24 spending your money at a table. I mentioned the regulation of markets. So let's turn to this part here. Could you talk about the difference between a regulated and an unregulated. market for evolution? It's kind of hard to define because, especially with the unregulated market, there's no real definition that I could really think of or fine. So we'll start with regulated market.

Starting point is 00:33:46 So a regulated market can mean multiple things, but the way that I kind of think of it is that they have some sort of regulatory body overseeing their games that they're offering in a specific demographic. But it's to degrees, right? I mean, you could have a regulatory body that's looking at the entire country. You could have it in North America at a regulatory body looking just at one state or in Canada, just at one province. And then in some cases with Evo's games, they might be regulated by, for instance, a national body, but then be taxed locally or provincially or in a municipality. So it definitely a little bit muddy.

Starting point is 00:34:21 But when you look at the unregulated market, that gets even more mudier because the unregulated markets include a lot of emerging markets. They might have small amounts of regulation in certain areas of the business, but not at other. So it's kind of a more incomplete setup. And then regulation and unregulated markets is a lot more disruptive because sometimes you'll get these gray market business units or if they're operating in gray areas, all of a sudden they'll become regulated. And then all the regulators will come in

Starting point is 00:34:49 and they'll actually want to basically punish the unregulated casino operators that were there beforehand. So that is a degree of risk for the business. And that's, I think, a huge reason why people get scared of the business is this unregulated market. So I know Betzen used to be in the Dutch market and they essentially just basically pulled out. And I'm not entirely sure what the details of that, but I have a feeling they were having problems getting their license from regulators. And then there's another operator called Entane and now they only operate in regulated markets. So you know, you can make an argument

Starting point is 00:35:22 that regulated markets are just a lot more stable than unregulated markets. And I probably would agree with you on that end. But the unregulated markets are just massive all over the world. So just skipping them entirely means you're giving up a lot of potential customers. And then as far as I know for the revenue model that they have, it's the same regardless of being unregulated versus unregulated. I'm not entirely, I haven't found anything that shows me that there's any difference between their business model based on regulation versus unregulated markets. Yeah. So I think a lot of people would say the reason evolution looks like such an attractive investment opportunity is because you aren't taking into account all this,

Starting point is 00:36:01 unregulated revenue they're bringing in. So it seems like the market is sort of discounting this unregulated revenue with the potential of that potentially maybe going away in the future. There's just there's just this uncertainty of what that is going to be five years down the line. Do you have any comments on, you know, how we should be viewing this unregulated revenue and maybe what that looks like from the big picture for evolution? Yeah. So I think as of the last quarter, I think they have about 60% of the revenue coming from unregulated markets. So, you know, it's not a low number. So the way I look at it is that evolution is a global company, right? So let's say one country, a small country, you know, decides to regulate and they don't like evolution. And they say,

Starting point is 00:36:48 you know, evolution, go kick rocks. We don't want you here anymore. Which that could happen. I mean, it hasn't happened at least that not disclosed to us yet. But the thing is because evolution, number one, is very geographically diversified. One, small country is going to make a very small dent in it. Obviously, if it was like the U.S., and that wouldn't be very good. But my other point being is that they're also always in talks with regulators. It's not like evolution wants to be in these unregulated markets. They're perfectly fine with it transferring over to regulated markets. So, you know, I'm pretty sure that they're very eager to get licenses and get whatever type of accreditation if a country is going

Starting point is 00:37:24 to regulate. I know the Philippines just recently regulated, and I believe they have their games in the Philippines. So, you know, as more and more countries regulate, I think that evolution will be there. And then another thing on regulation that you have to think about and that I think about often is, you know, countries are, you know, you can have your stance on gaming and whether it's good or not or whatever. But the thing is, is it's tax money, right? You basically are just printing tax dollars for, you know, whether that's national, state, provincial, whatever. And, you know, tax dollars are hard to come by. And this is a pretty easy lever for people to press to basically get more tax dollars and, you know, do with it, whatever you'd like. And then like also what

Starting point is 00:37:58 Clay was talking about with people thinking that the regulated market should deserve, say, like a higher multiple than unregulated market, I don't even necessarily disagree with that. You could be right because, yeah, the regulated market, it's a lot more stable. And, you know, it's more certainty as well. And obviously the market loves certainty. So that's one way of looking at it. I just don't think that they're going to lose their unregulated market share at a quick rate anytime soon. So, yeah, you'd have to take that into account when you're valuing the business. Yeah, it's funny. You mentioned the tax aspect. just pointing to the incentives of these governments around the world.

Starting point is 00:38:33 In Lincoln here, where I'm based, there was recently a casino that opened. It was the very first one that was opened in Nebraska that I'm aware of. And, you know, many people were against this. But it just seems like this inevitability where governments need a way to, you know, fund what they're doing and bring in this tax dollars. And, you know, it just sort of feels like an inevitability in so many of these areas of the world. So how about we turn to the revenue breakdown for evolution geographically? What continents do they have major footprints in and where's some of their biggest growth coming from?

Starting point is 00:39:12 Yeah. So just to start off with the geographic distribution, so Europe's around 38%. And I believe this is of last quarter. Europe is 38%. Asia is 38%. North America, 12%, Latin America is 7% and others, 4%. So all the areas are growing right now. There is, like Clay mentioned her a little bit earlier with the slowdown in growth. North America, which was growing very, very fast, has kind of slowed down a little bit. So that's kind of been a bit of a drag. But Asia and Latin America right now for evolution are the fastest growing markets. Latin America is going through a lot of regulations and legalization. And I think that's a huge market for evolution in the future. And then, yeah, so if we look at growth drivers in the future, though, I mean, North America still is,

Starting point is 00:39:56 I think one of their biggest growth drivers. You could probably say Asia is number one, but North America is huge. And the thing that's interesting about North America is that, you know, there's just, there's a lot of disclosure. So you can figure out kind of, you know, how many states there are and make your projections from there. But yeah, like Clay said, games are available right now in five U.S. states. Obviously, there's a lot of states.

Starting point is 00:40:16 And even if you can make the argument that it will never be legalized in every state in the U.S., and that's perfectly fine. But, you know, even if it gets to 50 to 75 percent, that that's a large. number of states and a lot of people that they can continue serving. So I think that they have a lot of ability to continue scaling up, to get to, a lot of ability to also get a lot of their unregulated revenue transfer to regulated revenue. And I do think that the North American market will be a pretty big contributor over the next few years as well. We talked about the very good economics of evolution's business. And the growth of the market overall and the attractive economics

Starting point is 00:40:56 is going to attract quite a lot of competition. So talk about the competitive landscape of the live casino market. Yeah, so live casino, it's interesting because if you look for direct comps, it's really hard to find. And the reason is that a lot of the businesses that are in eye gaming are also in other things. Like, you know, a lot of them have sports books. And unfortunately, you know, as good as or as fun as sports books are for certain people, the economics just aren't as good.

Starting point is 00:41:24 So essentially, if they have a live eye gaming section, it gets dragged down by other sections in their business. And then, so yeah, so as a pure play play play, it's, it's pretty hard. So play tech, they're good. They have 89% of their revenue from regulated markets. So that's very, very good. Entain also is another business which operates exclusively in regulated markets. And then Betzen is another one that is focused on regulated markets, but I couldn't find a percentage that they disclosed. And I have a feeling they're not taking on any more business onto unregulated markets. So you are kind of seeing some of these businesses move away from unregulated markets, which actually could be one of the reasons why evolution's share of the unregular market just keeps on increasing because they're just

Starting point is 00:42:03 onboarding that on. And then in terms of RNG, which, you know, they do have a section, pragmatic gaming, which is private. So it's really hard to find out much about them. But they're really good. So from what I was able to find, they have actually superior margins compared to evolution. And so I found that just from Ali Gundaz, who's a really good account to follow on Twitter if you're not about evolution. But yeah, and their RNG margins are really good at like EBITDA margins, I think, are well into the 50s. So clearly pragmatic is doing something right here. Clay and I also got the chance to speak with Shrevis Wanathon, who's also a professional investor and he owns the business as well. And he said that the R&G businesses that they have bought have helped with increasing the overall margins of the business.

Starting point is 00:42:47 So that's kind of one one interesting point about R&G, but generally speaking, it seems like the live casino is kind of the most attractive area. And luckily, that's where they're focusing the most. I'd like to also talk about Evolution's competitive advantage in Moat. Currently, the most recent number I saw is that they have a 60% market share in the live casino industry. And I think one of the key things Evolution has done, as you just mentioned, is that they put a huge. huge focus on this from the beginning. We mentioned the RNG, but live casino, it seems to be the core of what they do. And all these other companies kind of have live casino just as a part of their business. And they might not have near as many games as Evolution does. Their expertise around this

Starting point is 00:43:34 might not be near as strong. And you mentioned the one-stop shop. It seems that so many of these casino providers just see evolution as just kind of the obvious solution to, you know, what they want to provide in terms of live casino. So talk to us about evolution's competitive advantage then. Yeah. So I've thought a lot about it. And, you know, they definitely do have some competitive advantage. I mean, if you look at their numbers, of course, they have competitive advantages. They wouldn't be putting up those types of margins if they didn't. But, you know, if you are just thinking about could someone theoretically just build a casino game and offer it to someone else, you know, yes, they could. Right. So, you know, in terms of barriers to entry, you know, they have their own

Starting point is 00:44:12 compares to the entry, but to me, it's more to do with the scale and the size of the business that, you know, a small, you know, if some one employee business wanted to come and try to compete, I mean, it would be very hard. And so I think a big reason of that is that evolution has their fixed costs and there's pretty much, you know, there's no way that some small business is going to be able to keep their fixed costs as low as a percent of their overall revenue as the evolution would be able to. They've also just done really, really well on previous initiatives that they've talked about. And every year, they seem to just do a really good job of operating their business the way

Starting point is 00:44:45 they say they should be and at a very high level. But, you know, is that a moat? No, it's not right. But so scale to me is definitely their mode. They have some sort of network effects like you just mentioned with this one stop shop. So, you know, like if, let's say someone created one game and they offer it to you, that's great and that's cool. But, you know, if you go on an evolution game, well, you can see that one game,

Starting point is 00:45:03 then you can theoretically get moved on to hundreds of other games. So that definitely is a huge advantage. And then also, you know, if you are a casino operator and you're looking to bring games in, you know, are you going to bring in one game that you have to pay fixed costs to or are you going to bring in Evolution, which has hundreds of games. And, you know, you have to imagine that some people want to play the specific games that Evolution offers. So if you don't offer their games, people will just simply go to another operator. So, yeah, it definitely has some types of network effects there.

Starting point is 00:45:33 And then also there are some switching costs, right? I mean, setting up a studio definitely is not cheap. Todd Houseouters talked about this. And, you know, it's not only is it not a, an operation that you can just kind of pick up right away. I mean, they've kind of perfected it because they've been doing it now for such a long period of time. So, yeah, I mean, I would say scale is probably their number one competitive advantage. And they definitely do have to be on to stay on top of things because there are competitors out there that are doing well and that are trying to come and take some of their market share. So, you know, they can't just sit on their laurels. they have to be innovative, but that's why they have taught householder. I mean, that guy,

Starting point is 00:46:06 you know, he's kind of like the Steve jobs of casinos. This guy just like, he's been creating games his whole life since he was a kid. And he has to keep doing that in order for, I think, evolution to survive. So, you know, you definitely have to pay attention to innovation and make sure that they're saying on top of things. But so far, they've been doing a really good job. Like Clay was talking about with the amount of games. I mean, in 2023, they made 100 and how much that's gone up. And I see that just continuing to keep going up over time. You mentioned innovation. And I was reminded that evolution in the live casino space certainly seems to be the innovator,

Starting point is 00:46:40 whereas you have all these other companies that see the success of what works within evolution. And you'll see a lot of them just imitate a lot of the games. And one of the ways evolution has sort of differentiated themselves is to create these branded games where they become known for these branded games. And you can't just copy and paste exactly. And I think that's a really strong indication where evolution is really the leader in this space. And then others are just trying to keep up with what they're doing. And there's a few other points I wanted to mention here in regards to the competitive advantage. You know, I think it's so easy to just think, you know, you set up a camera, you set up a table, you grab a dealer, start dealing some cards and start setting up your business.

Starting point is 00:47:23 But it really isn't that easy. I think Shree, Viswanathan, you mentioned him. He had this quote that I loved where he said, the barriers to entry is low, but the barrier to execution is high. So you mentioned, you know, all these things that can sort of happen with the table. A card flips over. You drop a card or whatever else. There's all these standards of practice that you need to have in place.

Starting point is 00:47:48 You need to be working with regulators to make sure that you're doing things right. And the scale is so, so important. You not only have to offer a better value proposition. to the casino operator, but you also have to be able to operate at a large scale to make any money. You can't just open up one table and expect to get the same level of traffic that Evolution's going to be getting. So there's so much fixed costs that goes into this. And it's just a big hurdle that companies need to get over to really make any money. And there's a few points related to this that I wanted to mention. Europe is Evolution's most mature market. And not a single land-based casino has a live

Starting point is 00:48:28 casino offering that's created in-house. So there's been all these years where they've paid evolution to host these games to, you know, offer these games for them. And not a single one of them have said, hey, we'd be better off doing this in-house. They're much better off just doing it through evolution. So again, the barrier to entry is low, but the barrier to execution is high. And then you look at the U.S., companies like Fanduel, Draft Kings, Penn, all these companies that many people are familiar with, they're all working with evolution. And these are big companies. They have money. They could theoretically do live casino themselves, but they don't because the implementation is just so difficult. And then there's just a high level of fixed costs. There's the uncertainty of,

Starting point is 00:49:12 you know, having to compete now with Evolution who's innovating 100 games a year. And if you're going to be in this business, you're really going to need to do it at scale. And yeah, it's just a tough space to be in. and it's just such an interesting dynamic where Evolution, they've been doing this, I believe, since 2006, and they've really been the leader in this space and really tough to compete with. Alrighty, let's turn to Evolution's management. What are some of the things you've found that are important to highlight here on their management team? Yeah, so management, I think, is good. I like how they have the high insider ownership.

Starting point is 00:49:47 Like I mentioned, they've done a good job executing. But, you know, obviously, like all management teams, they have their, patches of hair that maybe they can improve upon. So a couple of things like it would be nice if they gave a little more disclosure, for instance, in their geography and where revenue is coming from. However, you know, you can make this argument that they, like you said, it's an incredibly highly competitive environment and they probably don't want their competitors knowing all this information about them. So I think that they're part of the reason that their disclosure with, you know, specific geographies and countries are, I mean, they don't talk about it at all is,

Starting point is 00:50:23 specifically because they don't want competitors knowing, okay, well, I should focus on this country or that country or whatever. And so as a result of that, they just don't share anything with shareholders. So, you know, unless you're an insider, you know, it's hard to figure out that kind of information. So yeah, I mean, I don't think that's probably going to change anytime soon because, you know, it's getting more and more competitive. So like an example was, for instance, they used to have Europe and they used to have England kind of as their own little market where they would show. But now they've just put England all the way into Europe. So you can't even tell, you know, well, is England doing really well, or is the rest of Europe or whatever. And, you know, of course, they know this, but they're not going to share that. The insider ownership, like I said, I think it's 18%. So nice and high. I love seeing that.

Starting point is 00:51:01 But they also have some insider buys on the open market, which is obviously super bullish. And then so, yeah, so then there's been a big thing lately about their incentive program. So they recently came up with this incentive program to use warrants as part of incentives. And, you know, generally speaking, not super, I don't think any shareholder is super enthusiastic about by getting diluted, but we also have to remember that evolution is essentially a tech company. I mean, they have to innovate and build tech in order to compete. And in order to do that, they have to not only attract talent, but they have to keep it there. And, you know, with the history of evolution's shares, it's a valuable asset, right? So they know that and now they're

Starting point is 00:51:41 using that as part of their incentive structure for the board members. So, you know, I mean, it's not my favorite the way that they did it, but I'm hoping that it'll keep some of the talent that they have there because they do have a lot of talent and that matters. Then when we look at capital allocation, that's been kind of a point of contention in terms of some of the acquisitions they made over the past few years. I think we'll cover this a little more detail later on the episode. So when it comes to their segments, like Clay said, you know, they've been mainly focused on live and I agree with that. And that's kind of where their excellence really comes from. If they probably just never even bothered touching R&G, I'm sure they probably would have done very, very good.

Starting point is 00:52:19 But, you know, if you just look at how they've excelled. So in 2020, they had 700 tables. Now they have 1,300. So, you know, that's growing at a very nice rate. And as we talked about earlier, they could probably increase that at high rates as well because they have more demand and they can keep up with. And then, yeah, looking at the amount of people they have. So back in 2021, or sorry, back in 2018, they had 4,300 full-time employees, 7,000 in 2021. And right now they're 13,000. So, you know, they're doing a pretty good job of finding more and more employees to work the tables, which obviously helps them make more money. Since 2020, live game revenue has increased by 43%. I mean, so they're doing a good job on that end. And then, yeah, so like we talked about with the

Starting point is 00:53:01 dividend policy, they kind of are sticking with that 50% number. They've had some pushback on it because people would rather just see them put money back into buying the stock. And you can make that argument. I personally would love to see them just buy their own stock. But, you know, it's pretty well priced now. But there's been times where it hasn't been well priced, right? And maybe not buying back would have been the right decision. But as of now, I don't see them stopping the 50% dividend. Yeah. So with the dividend policy, it's going to stay. And I'm hoping to see a, you know, it would be really nice to see them say, okay, we're going to keep paying 50% out as a dividend. And then with the remainder, plug whatever we need to back into the business. And then with everything else,

Starting point is 00:53:41 do buybacks. I would love to hear them say that. They haven't said that yet. But they are doing this buyback right now. They're buying back a lot of shares. You mean, you can go on their website and they're buying it all the time. So hopefully, if the prices stay here, I think, I hope they just keep buying back shares. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why Vantza is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you

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Starting point is 00:57:17 Back to the show. Yeah, the 50% dividend policy, it's something we as shareholders you just have to sort of live with and just sort of expect going forward. And hopefully they do transition to do more of those buybacks and they pull back the dividend a bit, especially with the share prices at these levels. but it sure seems like there's one investor who joined our community, he said, it seems like there's a capital allocation epidemic in Europe where maybe don't make the best allocation decisions, especially when it comes to dividends.

Starting point is 00:57:46 But sometimes as investors, we just take what we can get sometimes and, you know, no company's perfect. And, you know, that's something that evolution has got a lot of pushback in terms of the management. For the buyback, I believe it was 400 million euros they announced in November 2023. certainly think that's a very good decision. And it was just before that, the CEO had a pretty big insider buy as 100 million Swedish croner for an insider buy that he made. And I think that's also a very good sign. His insider purchases seem to have been pretty timely because he also purchased

Starting point is 00:58:19 shares in late 2022 at an even lower price. So that was a very opportunistic buy for him. And he sees where this business is heading and he understands capital allocation pretty well, even though the board, seems to want this dividend policy and such. And I think it's worth highlighting the Todd Hossalter, who we mentioned earlier. He's the chief product officer. He has a very important role with Evolution because he's in charge of developing the new games and ensuring that Evolution has the best of the best when it comes to live casino games. And it's probably worth keeping an eye on him, keeping an eye on the number of new games

Starting point is 00:58:56 they're developing and how those are playing out. and just seeing how that changes over time. And he does various presentations and he's fun to tune into. He had a recent presentation that he asked the audience essentially, what is the largest gambling company in the world? And, you know, many people are going to be thinking, oh,

Starting point is 00:59:15 evolution or some huge casino in Las Vegas. But he put Coinbase on the screen. And I just thought that was so funny. Coinbase has a, I just looked it up. They have a market cap of 29 billion evolutions at 24 billion. But I believe at the time of the present. Coinbase's market cap was much higher. And his main point was that younger people,

Starting point is 00:59:34 they really treat money that goes into something like Coinbase or something like Robin Hood. They really treat this money as if they're investing. But in reality, they're actually gambling because they're just making these terrible bets on meme stocks or various alt coins or whatever else and end up losing most of their money over time. Simply put, in my humble opinion, they don't really know what they're doing in terms of what they're buying and understanding the fundamentals. So it's really not feasible to think that Coinbase is going to be eating 100% of the gambling market. But it's interesting to think about how it reminds me of Netflix where the Netflix CEO, he mentioned that Netflix's biggest competitor isn't Disney Plus or any of these other companies.

Starting point is 01:00:17 Their biggest competitor is sleep. And that's sort of what it reminds me of for evolution, where the currency of today is your attention and obviously where you're spending your dollars. and it's why a company like meta is just so valuable because they have so much of people's attention and then obviously that gets advertisers. So I think that's the case for evolution where they need people to generally want to spend time gambling within these types of games that they provide. And it's a dynamic market. You know, people's needs and wants change gradually over time.

Starting point is 01:00:50 And that's why they're innovating. They're continuing making their games better, making these experience better. and Todd Hallsalter is definitely super, super passionate about this stuff. You called him the Steve Jobs of this space, which is quite funny. He definitely has a lot of passion for what he does. And yeah, I think they'll continue to do well in terms of this. But definitely a risk that, you know, people are going to continue gambling, whether it be through Coinbase or whatever else.

Starting point is 01:01:16 And hopefully Evolution stays on the forefront of that. Yeah, I really like that comparison he made. And yeah, I mean, there's all sorts of ways to get people to take. now and gambling is just one of them. But like you said, you know, gambling can take many forms. I mean, when people are on Robin Hood and Coinbase, I don't think they think they're gambling, but like Todd Householder says, you know, you can make the argument that they are. To the point on capital allocation, they've, Evolutions made a few big acquisitions where they issued shares to purchase some of these R&G companies. And the market's sort of treating this as

Starting point is 01:01:51 pretty bad purchases. One, because they issued shares to do it. And these RNG games maybe haven't performed quite as well after the acquisition. Plus, you factor in the price they paid for them. But I think investors who on the stock make the case that there are some synergies at play where these R&G companies overall have made evolution a better business. Even if you look at the individual business units, maybe they're not doing quite as well as we've hoped. So what are your thoughts on some of the acquisitions they've made in recent years?

Starting point is 01:02:21 They've spent a couple billion dollars, whether that's either through cash, or shares on Net Ent, No Limit City, and Red Tiger. None of them have turned out particularly well. They also bought them during, I think it was in 2020 and 2021 when markets were pretty euphoric. And so they probably overpaid for all them. You know, they're all growing R&G section. You know, when you look at it, it's only growing in kind of the mid single digits, which isn't great.

Starting point is 01:02:46 I don't think that's what they saw when they bought it. So like, for instance, so Net Ent was purchased for $2.1 billion euros. And I believe it was all purely shares. So if I went back and looked at the price, it's about 12.4 times revenues and 26 times EBITDA, which, you know, for a high quality business doesn't sound horrible, but you would also assume that there'd be a good amount of growth embedded in that as well. So yeah, like if you compare it to Evo's numbers at the time, it was actually trading at a discount. So maybe they felt like because it was trading on a discount, it made more sense to just use shares. But, you know,

Starting point is 01:03:16 net end, it just, it turned out to not be growing anywhere close to the rate Evo and its live gaming section was growing. So it's hard not to say that they didn't overpay a lot for that acquisition. And so, yeah, they made that acquisition in June of 2020 and the market was heating up at that point of time. So, you know, if they maybe waited a little bit or if they bought it a little bit earlier at a bigger discount, then maybe it would have worked out better for them. Who knows, it's, it's pretty hard to say. But yeah, in terms of their, their M&A work, it's, I would prefer that they probably just stayed away from it and probably just kept putting money back into the dividends and into the buybacks and just into the live gaming section because the acquisition part

Starting point is 01:03:55 just hasn't done much for to deliver shareholder value. Yeah, that's a good point that we should probably continue to monitor what they're doing in terms of capital allocation, especially in terms of these acquisitions and the prices they're paying for them. I think they're mindful of this. I know they're talking with investors and probably learning quite a bit in terms of they've received There's a ton of pushback in terms of the dividends, and I'm sure they seem to be quite receptive to some of these feedback from shareholders overall. Shri Vismanathan, he just releases 2023 letter, and he mentioned that him and a group of investors met with the CEO in New York, and he shares some insights in that letter that I'll be

Starting point is 01:04:35 sure to link in the show notes as well for those that are interested in some of the things he picked up just from studying the business over the past year or so. So we can't talk about any business here on the show or do a deep dive without talking about valuation. So their recent growth has slowed, which makes it a bit difficult to project where this business will be at years into the future. So how do you estimate their future growth and intrinsic value? Yeah. So with evolution, I like to use just the simplest possible ways for evaluating the business. So I just like looking at their earnings per share, which has been growing at a very high rate and then kind of just projecting that out for a few years, putting a terminal multiple

Starting point is 01:05:17 on it and then discounting it back to the to present value. So, you know, if you look at their EPS, the last decade is going to 63%. No chance that that's sustainable into the future. But we can kind of look at what they've done recently. So I think just just looking at how revenue's grown and how margins have been increasing, I think kind of like a mid to high 20s percent for EPS seems seems reasonable to me. It's less than half of what it's been in the last 10 years. So I'll just, I'll use that number, look out for the next few years and then put an earnings multiple, terminal earnings multiple.

Starting point is 01:05:55 That's a little bit tougher to come across because, you know, you can say that the company is going to get more and more mature. So what kind of earnings multiple does it deserve? You know, is it going to be just kind of your standard 15 to 20 of a kind of an average business? I don't know. I guess you could make that argument, but I do think it's definitely a, it's definitely not at an average business. I think it's an above average business. So I think it turns a little bit

Starting point is 01:06:16 of a premium. You know, it's, it's a business that's that's traded at very high valuation levels in the past. But, you know, realistically something in, you know, the mid, early 20s, I guess, sounds, sounds good. So if you use those numbers and plug them in, you get about a 25% compound annual growth from here. You know, if you want to say that it needs a lower exit multiple, so I used 23 here, you could make that argument and you're probably still going to get pretty good growth because it is growing its earnings at a pretty high rate. But yeah, I mean, over time, they're also going to probably hopefully get more, more regulated market share. So that'll make their earnings, I think, a little bit more valuable. And you can justify putting a higher valuation on

Starting point is 01:06:54 that as they get more and more regulated revenue, which I think they will over time. So that's kind of how I look at valuing the business. So just, you know, look at what I think EPS will be in the next few years and just discount it to present value. And then also they do have those buybacks. So if they do the buybacks really well, that's only going to do, being increased the earnings per share. Yeah, Kyle, you and I, we talk about, think about, discuss the idea of finding a multi-bagger investment amongst our community, amongst the discussions we have. And really the holy grail of finding a multi-bagger, I think, is you want a small company

Starting point is 01:07:31 that dominates its market. It has a lot of potential for future growth. And the trick is finding that sort of situation. at a fair price. And I really think you have really unique situation here with evolution in terms of their moat, the size of their market. If evolution were to lack in any of these areas, it'd be where they're at in their growth journey. They've been doing this for over 15 years. So we're 15 years into the story. But it sure seems like there's still substantial room to run over the next decade. And I'm reminded of something Monish Pabarais has talked about where

Starting point is 01:08:05 ideally you're in a situation where there's low risk, but there's high uncertainty. And when I look at evolution, I see you got these growing pains and hiring issues and, you know, this turnover at the lower levels of the business. You have the unregulated markets in these gray areas. You have competitors, you know, leaving the market. You know, what's going to happen to that over the next five years or so? You have these acquisitions where it seems like they've overpaid. You have competition coming in and wanting to eat Evolution's lunch. But despite all that, you see revenues tick up year after year. You see earnings tick up year after year.

Starting point is 01:08:42 And, you know, it's like you have to figure out what's signal and what's noise and what's your holding period with this. You know, if you buy in and you need to sell your shares in three or six months, maybe you'll lose money. That's just the way the stock market is within any company. And I think for you and I, Kyle, we plan on holding on to it for, you know, at least a few years unless our thesis of what we've talked about today is busted, but it sure seems like, you know, five years from now, it sure seems like revenue and earnings are going to be

Starting point is 01:09:09 quite a bit higher than they are today. And at the end of the day, that's pretty likely going to lead to pretty good stock returns for us as investors. Yep, that's exactly how I see it. I really like your point, too, about low risk high and certainty. I think you're completely correct that it definitely fits that into that mold. But yeah, like you said, I mean, and like, you know, Buffett and Munger always say, you know, you just want to buy businesses. that are going to have a lot more profits in a few years' time. And I feel there's a very, very good chance that evolution does that. I think it was Chuck Ockery who said that you want to find the two or three KPIs that are going to make all the difference within a business or within an investment.

Starting point is 01:09:46 So tracking those KPIs over time and ensure that they're heading in the right direction and point to the fact that your original investment thesis is intact. What are some of the most important KPIs you would track for this company? Yeah. So I completely agree, you know, Every business has their KPIs that are important and it's your job to figure out what they are. A couple that I really like to track on pretty much a quarterly basis are employee account, which we went over. You know, you kind of want to see that going up and not down and they've done a really good job on that end. How many tables they have?

Starting point is 01:10:15 So like I mentioned, they're at 1,300. Obviously, we'd love to see that keep going up because if the more tables they have, that probably means that they're serving more customers and that means I'm making more money. Ebit dumb margins, very important for them. They've expanded their EBITDA margins at really high rates. You can put in any margin you really want here. They're all going up, but their signaling of EBITDA margins going up definitely shows that they have competitive advantages.

Starting point is 01:10:38 So you want to make sure that that's, hopefully it keeps going up. I mean, it's not going to go up forever, of course, but you definitely just want to make sure that it's not coming down. That's really important. A new studio growth. So this is something that's kind of been stunted lately. I feel I trust that management will continue delivering on this. So it's really important that they keep making new studios because that's how they, you know,

Starting point is 01:10:58 make more tables and get more employees in the door. So that's very important. Regulated and unregulated revenue share definitely would love to see the regulated market share continue to go up. But as more and more of these businesses are, their competitors, sorry, are trying to just take up the regulated market share. There's a chance that unregulated revenue just keeps growing for them. So that definitely is something you would have to be comfortable with. So that'll be something interesting to just monitor in the future. And then geographical revenue share, You want to make sure hopefully that all geographies are growing. There's going to be some bumpiness.

Starting point is 01:11:31 They're not all going to grow linearly, right? You're going to have some that outperform others. Like, you know, North America was doing really well for a while. Now it slowed down in Latin America and Asia have kind of gone up. Asia seems to always grow for them. So it'll be important that that continues doing it. And yeah, those are kind of my general KPIs that I track for them. It's funny.

Starting point is 01:11:49 I can't count the number of times I've seen on like Twitter or whatnot where someone sees evolution. They look up the company. They see it's in the gambling space and they're like, the numbers look great for this company, but it's a gambling company or it's eye gaming and that's just not a market I want to get into. And it reminds me of the case of meta. There's been a time or two here on the show where I've talked about meta. I shared Aswat to Motorand's Doomsday analysis. That was in late 2022. That was near the bottom of meta. I believe the shares are today or north of 350. And at that time, the shares were like $90 or $100. So you're up well over $3x on that. But I never bought shares. Like his analysis totally made sense to me. And it seemed

Starting point is 01:12:34 ridiculously underpriced. But I think you could say the same with other companies that never did rebound. So there's some selection bias or survivorship bias here at play. But in talking about meta, why did I not buy shares? Well, the first thing that sticks out to me is that I'm really not not that big of a fan of Mark Zuckerberg. And the second thing is I know that meta's products do harm overall to society. We know that teens experience higher levels of anxiety, depression, and all these things, partially because of these social media platforms that they're on and how addictive they are. And, you know, they want people to just be stuck to their screens, stuck on their platforms. And I mentioned earlier that attention seems to be the new currency today.

Starting point is 01:13:19 And the reason I mentioned meta here is because evolution is in the eye gaming market. They have an incentive to make their games as fun and as addicting as possible. So their users just come back time and time again and gambling more and more of their money over time. And it brings to this question of, you know, is it ethical for someone to own shares in a gambling company? And I think it's a bit hypocritical for me to say that I don't want to own meta. but I'm fine with owning evolution. And it's interesting because part of the reason I think is that I personally enjoy playing cards and going and playing poker, blackjack or whatnot.

Starting point is 01:13:59 And I have fun totally knowing that the odds are stacked against me. Like, over time I'm going to lose money. And, you know, I might get excited the one time I go and win a couple hundred bucks. But, you know, I'm also aware that, you know, a gambling addiction is a real issue for a lot of people out there. So there's really no easy answer. I know that casinos likely aren't going anywhere. These governments are in tax dollars off of them and they enjoy that.

Starting point is 01:14:24 So I'm curious to hear your thoughts on this. What are your thoughts on, you know, owning shares in a company like Evolution where they're providing a product? You know, obviously people enjoy using the product, but it might not be beneficial in terms of using it for a lot of people. Yeah. So, you know, in my opinion, investing is a very personal endeavor and you can really make an argument for or against anything really and and what one person thinks is right another person might

Starting point is 01:14:51 think is wrong and it's really hard to you know say one thing is right for everything one one thing is right for everyone and one thing is wrong for everyone so because i i agree with you because i i personally find gambling fun i have no problem going and gambling and accepting that essentially i'm just paying for entertainment you know i'll go and maybe i'll spend a hundred bucks or whatever and you know if i lose it that that's perfectly fine that's just the price you pay for entertainment i don't go in they're thinking that, you know, I'm going to lose this money and then I'm going to go back the ATM 50 times and make it back. But, you know, unfortunately, there are people who do that. But yeah, so I think you kind of have to figure out for yourself if you think that this is,

Starting point is 01:15:28 that gambling is not a industry that you want to be in to own a business, then don't own the stock perfectly fine. I don't judge you for that just as I hope you don't judge me for owning it. But, you know, I mean, look at Buffett, right. He owns Coca-Cola and, you know, he won't I own all sorts of other businesses, but Coca-Cola is, I personally don't think the product's very, it's not healthy. I mean, I don't think I think I think that. I know it. It's a fact. But so, you know, you can kind of warp and twist anything into your own mind. And whether it's right or not, I mean, I don't know. It's your money. You can kind of do with what I do with it, whatever you want. But, you know, for me, I've tried their product, evolution's product. And I think I like it.

Starting point is 01:16:06 I think I find it fun. And for me, that's all I really need to know in order to buy the stock. Awesome. And Todd Hall Salter, he's talked about, you know, just thinking about the end user and like what's best for them. And I honestly don't think he means to, you know, hurt users in the way that maybe some other companies do. So, you know, you want to partner with good people in terms of the management team. And yeah, I mean, there's certainly a liking bias at play here where he's fun to listen to. It seems like a great guy. Who knows what his true intentions are. And it's a good reminder that life and investing is just, messy. There's no easy. There's no simple answer and no company or product is necessarily perfect. And you're certainly right with regards to Buffett and Coca-Cola. And I've said the same thing when I was talking about meta too. So, Kyle, I don't want to hold you too long here. I really appreciate you joining me. And it's been a fun discussion. And I'm sure the listeners will enjoy tuning in. I'd love to hear some feedback from some of the listeners. So how about you give a handoff to how the listeners can get in touch with you if they'd like. And also please mention everything.

Starting point is 01:17:10 you've been doing with TIP because you've recently transitioned to become a host on we study billionaires and hosting episodes here. So you can also just mention kind of what you're up to within TIP. Yeah, absolutely. So, you know, the easiest way if you want to get in touch with me kind of on social media is just through Twitter. It's at Irrational MRKTS, Irrational Markets. I'm on very, very active. You can feel free to DM me any questions. I'll probably get back to you. And yeah, with TIP, I'm on two podcasts. So I originally started on the Millennial Investing podcast and now I'm doing an episode every two weeks on We Study Billionaires. So I've had a few episodes on there that have pretty good reception and I'm really enjoying that. So yeah, if you,

Starting point is 01:17:47 you know, if you enjoy listening to this podcast, you're probably already on We Study Billionaires, but I'm also on an investing podcast. So you might want to check out that feed as well. Awesome. Well, I can't wait to chat with you again next quarter and see what company we find to discuss then. Thanks so much, Kyle. I really appreciate it. All right. So like I said in the I wanted to include a segment here that dives into the events we have planned in Omaha in May of 2024 during the Berkshire Hathaway Shareholders Weekend. That's from May 3rd through May 5th, 2024. First, I'm going to outline what's happening with our TIP Mastermind community. And next, I'll touch on the Berkshire Summit, which is a much more exclusive event.

Starting point is 01:18:30 So for the TIP Mastermind community, we have two social events planned, one for Friday and then one for Saturday night. These two social events are exclusive to members of our Mastermind. community, which is a paid group that our audience members have to apply to be a part of. We have some space booked out in downtown Omaha, and members are going to come, socialize, have a few drinks on us for that evening and network with other members of the community. And that's just one of the really fun things about it is knowing these people online, connecting with them, and then eventually getting to meet them in person. We had started the community just prior to the Berkshire meeting last year, and we created

Starting point is 01:19:04 it to have a place for like-minded investors to connect with each other, but also do other things like collaborate with TIP hosts like Kyle Stig and myself, get access to Q&A sessions with special guests like Chris Mayer, Toby Carlyle, Godham Bade, Indian Castle, and also get access to the two in-person live events that we host each year. One of my personal favorite things about the TIP Mastermind community is to have a network to bounce stock ideas off of, or even get new ideas to add to my own watch list and portfolio. The mastermind community has actually become my number one research for getting new ideas. The live events we're hosting in Omaha are just a small part of why we set up our TIP Mastermind community. We recognize that so many people don't have

Starting point is 01:19:47 a network of like-minded people to bounce ideas off each other, and it was even a need for me personally as an investor. Just being a part of this group has been such a pleasure, and I've met with so many amazing people, some of which have become friends of mine. Since starting the community back in April 2023, I've just been amazed by the number of high-quality people that are joining from all sorts of backgrounds and all sorts of places in the world. We currently have around 100 members of the community and we'll be capping the group at 150 members in order to keep it high quality. I've had a number of people ask me what types of members are in the group. We really have a wide range of people that are joining. We have some people who are earlier on in their learning

Starting point is 01:20:27 journey, and then you have people that work in the investment industry. But the key theme is that all of us really come from this value investing school of thought, and we primarily talk stocks and not too much about other asset classes. And a lot of people I've noticed have this sort of quality framework where they're definitely looking for something high quality and not so much deep value or cigar butt type investors. No matter where you're at in your personal journey, we are confident that you'll find like-minded value investors in the group who are very much on the same journey. as you. At the time of recording, the price to join is 197 per month or 1970 per year, and this is subject to increase in the future. You can learn more about our mastermind community by visiting

Starting point is 01:21:09 Theinvestorspodcast.com slash mastermind. We're simply emailing me at Clay at theinvestorspodcast.com. The website is going to direct you to our wait list, and if you're specifically interested in meeting with us in Omaha, then you can sort of expedite the process and just shoot me an email at clay at the investorspodcast.com. That'll speed things up a bit for you. Again, our events are specifically for the community and we are not going to be hosting any other events outside of the summit. So turning to the Berkshire Summit here, this is a much more private, smaller, and more exclusive event for those who really want to make the most of their time in Omaha. We're hosting two very special dinners on Friday and Saturday evening, and a number of very special guests are going

Starting point is 01:21:52 to be joining us, some of which have been the more popular guests on the Richer Wiser, Happier podcast. We'll also have a social hour after each dinner for whoever would like to stick around for those evenings, and I'm going to be organizing this event and really just helping attendees have a really great experience during their time here in Omaha, and this is actually going to be my fifth time attending the Berkshire meeting, so I definitely have a feel for sort of what's happening in Omaha. I used to live there. and I've been to many of these events a number of times. We'll be sure to have great seats saved for you at the meeting,

Starting point is 01:22:23 make sure it's easy to get around Omaha and get to our dinners, and make sure you're in the know on what's happening with other events. I personally think both social events we're hosting will prove to be fantastic networking opportunities with very high-quality people. To learn more about the summit, you can visit the Investorspodcast.com slash Berkshire Summit or simply click the link in the show notes or even email me at clay at theinvestorspodcast.com. With that, thanks for tuning in into today's episode,

Starting point is 01:22:51 and I look forward to meeting you in Omaha. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only,

Starting point is 01:23:13 Before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP604: Best Quality Idea Q1 2024 w/ Clay Finck & Kyle Grieve

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