Artificial intelligence (AI) is the hottest industry of 2023, and semiconductor giant Nvidia has been helping to lead the way thanks to its powerful data center chips that make it possible. As a result, investors have sent Nvidia stock surging 187% in 2023, catapulting its valuation into the $1 trillion club.
That's impressive, but one small-cap AI stock is actually performing even better. Shares of Oslo, Norway-based Opera (OPRA 4.55%) have soared 203% this year and currently trade at an all-time high. Opera has developed a popular web browser with powerful built-in AI tools, and not only is the company growing nicely, but it's also profitable to the point that it's returning money to shareholders.
Despite the stock's strong gains in in 2023, Opera is still just $1.6 billion in size and attractively valued. In other words, it's not too late for investors to buy in. Here's why.
Creating web browsing experiences of the future
Opera has developed a web browser that offers more functions and better usability versus competing products like Microsoft Edge and Alphabet's Google Chrome.
Its browser comes with a built-in ad blocker, VPN, messaging service, and even a crypto wallet, whereas other platforms typically require the user to install plug-ins if they want those features. But, most importantly, Opera also comes with AI browsing by default.
The company has built its own generative AI chatbot called Aria, which is capable of answering questions, writing computer code, and creating social media posts, for example. But Opera also has a deal with OpenAI, which means ChatGPT is a default feature as well -- so users get the benefit of a tag-team effort from a powerful AI duo.
Opera has also built a special version of its browser specifically for gamers called Opera GX. It comes with CPU and memory limiters so more of the user's processing power is available to play games, and it also has popular chat and streaming platforms like Discord and Twitch in the sidebar.
In 2023's first quarter, Opera GX had 21.7 million monthly active users, compared to 319 million for the browser overall. The overall user count has been declining recently as the company shifts its marketing strategy away from outright growth to accommodate a greater focus on monetization.
Opera generates most of its revenue from search and advertising, and it's targeting fewer users in jurisdictions that monetize at lower rates -- even though those users are cheaper to acquire.
Opera is growing steadily, and profitably
The company generated $128 million in revenue during 2017, and it expects that figure to more than triple by the end of 2023, with management guiding for as much as $390 million. It has been profitable every year since 2017, with the exception of 2021, when it incurred an impairment charge relating to one of its investments.
In fact, efficiency has been a core focus for Opera over the last few years. As I mentioned, the company has shifted its attention to the geographies where users monetize at the highest rates, leading to a whopping 174% increase in its average revenue per user (ARPU) since 2019.
Data source: Opera Limited.
Opera's profitability has enabled it to return money to shareholders through share repurchases and dividends. In a recent presentation to investors, the company said that it has spent $198 million on buybacks since 2020, which is equivalent to 28% of its outstanding shares. In theory, assuming everything else remained constant, that move will have organically lifted the stock price.
The company also highlighted its first-ever special dividend to shareholders, worth $71 million, which was paid out in February this year. Special dividends are usually one-off occurrences, so investors shouldn't bank on regular payments, but Opera does have $30 million remaining in its current share buyback program.
Opera stock trades at an attractive price
As far as AI stocks go, Opera's valuation appears incredibly reasonable compared to its peers in this emerging industry. Based on the company's $346 million in trailing-12-month revenue and its $1.6 billion valuation, shares trade at a price-to-sales (P/S) ratio of just 4.6.
AI software company C3.ai is trading at a P/S of 13.1, and Nvidia trades at a whopping multiple of 39.3.
Of course, Nvidia sits at the heart of the AI industry, so it certainly deserves to trade at a premium compared to a company like Opera, which is using AI in a very specific way. But Opera does have a significant growth opportunity as the internet search industry shifts.
Microsoft's Bing is leading the charge when it comes to chatbot-powered search, with Google's Bard platform lagging behind. It's probably fair to say Opera is further along than Google because it's using the battle-tested ChatGPT tool just like Bing, and that's a notable achievement.
On the gaming side, Opera thinks its addressable market for GX could be as large as 500 million users. That means its penetration is less than 5% right now, which leaves a long runway for growth.
Opera might not become the next Nvidia when it comes to AI, but it's growing faster than the chip giant this year, and its modest valuation suggests there could be plenty more upside to come.
