Opera (OPRA 5.76%) has taken investors on a wild ride since its initial public offering (IPO) in 2018. The Norwegian web browser developer went public at $12 per American depositary share (ADS), but its shares slumped to an all-time low of $3.49 on Oct. 24, 2022. However, investors who bought the stock on that day were well rewarded as it rallied to a record high of $27.83 on July 13, 2023.

Today, Opera's stock trades at around $10. Should investors consider that 64% pullback to be a buying opportunity or a red flag? Let's review four reasons to buy Opera -- as well as four reasons to sell it -- to see where this divisive stock might be headed.

A person works on a PC in an office.

Image source: Getty Images.

The four reasons to buy Opera

The bulls love Opera because it's successfully monetizing its monthly active users (MAUs), its margins are expanding, it pays a hefty dividend, and its stock looks cheap.

Opera served 316 million MAUs across its PC and mobile browsers, GX gaming browser for mobile games, and Opera News App at the end of the second quarter of 2023. On an annualized basis, its average revenue per user (ARPU) rose 25% year over year to $1.17 as it gained higher-value users in Europe and North America.

Opera believes new artificial intelligence (AI) features will keep boosting its ARPU. Over the past year, it partnered with ChatGPT's creator OpenAI to add AI-generated services to its web browser's sidebar, rolled out an integrated AI assistant called Aria, and launched Opera One, a new version of its browser that provides bundled AI services.

Opera's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin jumped from 11.6% in 2021 to 20.6% in 2022, and it continued expanding to 23.3% in the first half of 2023. It attributes that expansion to its reduced marketing expenses and its growth in higher-ARPU markets like North America and Europe.

It's also profitable on a generally accepted accounting principles (GAAP) basis. To return some of its rising profits to its investors, Opera paid a special dividend of $0.80 per ADS this February and greenlit a recurring semiannual dividend of $0.40 per ADS which gives it a high forward yield of 7.4%. It paid out its first recurring dividend in late June.  

With an enterprise value of $856 million, Opera only trades at 2 times this year's sales and 11 times its adjusted EBITDA. Those low valuations, along with its high yield and exposure to the AI market, could limit its downside potential.

The four reasons to sell Opera

The bears believe Opera's tiny market share, slowing revenue growth, ongoing loss of MAUs, and Chinese ownership will prevent its stock from ever taking off again.

Opera controls less than 3% of the global web browser market, according to StatCounter. That puts it in a distant fourth place behind Alphabet's Google Chrome (63%), Apple's Safari (20%), Microsoft's Edge (5%), and Firefox (3%).

Opera could struggle to gain more MAUs across this market, which has already been saturated by tech giants. Its MAUs have consistently declined over the past year as its year-over-year growth in annualized ARPU and total revenue decelerated:

Growth (YOY)

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

MAUs

(10%)

(8%)

(5%)

(5%)

(3%)

Annualized ARPU

46%

41%

42%

30%

25%

Total revenue

29%

28%

33%

22%

21%

Data source: Opera. YOY = Year over year.

If Opera continues to lose MAUs, it will likely need to pile on more advertising and AI features to grow its ARPU. However, that strategy could easily backfire and turn its browsers into messy ad-filled platforms -- which would likely alienate its users who had considered it to be a lightweight alternative to Chrome, Safari, and Edge. Its "AI tools" could also lose their luster as its larger competitors roll out similar first-party AI features in their browsers.

Lastly, Opera is still headquartered in Norway, but it was acquired by a consortium of Chinese investors prior to its IPO seven years ago. Its largest investor is still a Chinese company, and it was hit with allegations of installing Chinese spyware in its browsers earlier this year. Opera refuted those claims -- which it claims come from "dubious anonymous sources" -- in a lengthy blog post, but its Chinese backers could still expose it to the escalating tech war between the U.S. and China.

Which argument makes more sense?

Opera's growth is slowing down, but investors seem to underestimate its resilience and ability to lock in its remaining MAUs. Its stock looks undervalued relative to its near-term growth, and its high dividend could set a floor under its stock price. So for now, I believe the bullish argument is still a bit more compelling than the bearish one.

Editor's Note: This article was edited to clarify that the company's largest investor is a Chinese company and that spyware claims are from unverified sources.