Is Evolution a buy?
Evolution Investment Case!
Humans have always had the proclivity to gamble, but for thousands of years, emperors, kings, religious leaders, and governors fought against this human nature.
Nevertheless, in the last 100 years, it has become increasingly clear that their efforts weren’t delivering the desired results, as people were still gambling, yet government coffers didn’t see any tax revenues.
Thus, gambling started to get legalized en masse, and today, some form of gambling is legal in over 100 countries.
I think it is fair to say that we are living in the golden age of legal gambling!
However, we are also living in two other golden ages, the internet and outsourcing!
Gambling is no longer reserved for fancy casinos or seedy gaming halls, as the internet and mobile phones have brought it to people's fingertips.
This has led to an explosion of online casinos!
But setting up an online gambling operation is not easy, apart from capital, one needs to design the games, build studios to live stream from, train employees, and ensure reliable delivery of services.
This is where Evolution Gaming comes into the picture, a provider of online casino solutions to internet casino operators.
Online casinos can’t get enough of Evolution’s services, enabling the company to 27X its revenues in a decade!
Understandably, such financial performance has sent Evolution’s stock up 4,053%!
In this article, Evolution Investment Case, I will take a look at their business model, opportunities for growth, and valuation.
Let’s roll the dice, shall we!
1. Business Model
2. Competitive Advantages
3. Online Casino Tool Booth
4. US Online Casino Legalization
5. International Online Casino Legalization
6. Financials
7. Valuation
8. Conclusion
1. Business Model
Evolution is a perfect example of how our modern internet economies work.
Uber is the world’s biggest taxi company, yet they don’t own any taxis, Airbnb is one of the world’s largest accommodation companies, yet they don’t own any real estate, whilst Spotify is the world’s largest music company, yet they don’t produce any music.
Similarly, Evolution is one of the world’s largest gambling companies, yet they don’t own any casinos!
Instead of operating online casinos, Evolution provides games, software, and other services that an online casino operator needs, such as:
Slot Machines
RNG Games
Live Casino Solutions
Game Shows
RNG stands for random number generator. These are games that are meant to replicate the experience of in-person casino games of chance, such as roulette, dice, poker, etc. Evolution provides hundreds of different RNG game variations to its online casino clients.
However, there are many gamblers who either don’t trust digital games or prefer the experience of a human dealer. Casinos want to serve these customers online, but they don’t want to bother with building their own studios, thus they outsource this task to Evolution.
Evolution has built 21 studios in 13 countries with over 1,700 tables that live stream popular games such as roulette, poker, dice, blackjack, and more. Casinos can pay to show a generic live-stream, or they can have their own customized and dedicated dealers who wear the casino uniform with logos and follow a particular script.
Apart from live streaming traditional casino games, Evolution pioneered the live game show experience. The company operates various engaging and entertaining game shows that aim to bring the Las Vegas experience to people’s screens. Games involve a trained host and presenter who do various challenges like spinning a wheel, with gamblers betting on the results.
In the YouTube video below, you can see a clip from their Crazy Monopoly live stream.
Evolution has developed many game shows, with Crazy Time being especially famous in the online gambling circles.
Such live games keep gamblers engaged, with the goal of making them fans of the game. As Evolution owns full copyright, if an online casino wants to leave Evolution for another provider or take their online business in-house, they will lose access to Evolution’s popular game shows.
Live game shows are extremely difficult to replicate, as it takes quite a lot of time to create an engaging game, train the hosts, and build a studio, all of which cost millions of dollars.
In addition to the games themselves, Evolution upsells various other features with its One Stop Shop (OSS) system.
Promotional Tools
Analytics
Cybersecurity
Compliance
Evolution uses various personalized and AI-driven promotional tools meant to reengage players. Pop-ups, promotional emails, special offers, free games, and more.
Additionally, the company provides important yet tedious back-office support services such as gamer analytics and data monitoring. These insights are crucial to designing more profitable games and developing better player retention.
Most importantly, in such a regulated industry that manages large sums of money, like online casinos, it is paramount to comply with all government regulations. Thus, Evolution manages cybersecurity and compliance.
In return for providing these services, Evolution takes a cut of the casino’s winnings!
This incentivizes Evolution to develop more engaging and profitable games.
Fees vary by the game. Generic games, such as slot machines, have the lowest fees.
While live games have the highest fees, with casinos paying between 10-20% of their winnings for Evolution’s best games, such as Crazy Time.
Additionally, Evolution charges clients with dedicated tables a monthly fee, sometimes tens of thousands of euros per table.
2. Competitive Advantages
On the surface, this seems like an easy industry. Why are online casinos parting ways with 10-20% of their winnings, can’t they take these operations in-house? Of course, they can, but it is harder than it looks. As the pioneer in this space, Evolution has developed certain competitive advantages:
Scale
Product Innovation
High Barriers to Entry
High Switching Costs
Network Effects
Let’s explore each in more detail.
As of Q1 2025, Evolution has over 22 thousand employees, a large share of whom are live dealers. Managing thousands of dealers using thousands of tables in 21 studios on multiple continents is no doubt complicated, but it gives the company strong scale advantages. It can deliver services at comparable prices to what it would take operators to build an equal quality service capacity in-house.
While Evolution has some competitors, they lag in product innovation. As I mentioned earlier, the company pioneered live game shows, and now they are pioneering AI and hybrid games. By blending slots, live gaming, and real-time betting mechanics in entirely new formats, Evolution is creating new and even more engaging games.
With their non-stop innovation and constant reinvestment, Evolution is not only increasing the already high barriers to entry for new entrants, but also making it harder for existing competitors to compete. To effectively compete with Evolution, tens or even hundreds of millions of dollars in investments are required.
But even if these investments are made, it could be extremely difficult to get casino operators to switch because of high switching costs. Upfront set-up and integration costs are significant. In addition to having to hire and train hundreds of new employees, new regulatory compliance and cybersecurity systems need to be set up.
Evolution benefits from a strong lock-in thanks to its One Stop Shop Model. This means that competitors need to offer significantly lower prices, but that leads to lower profit margins, leaving less room for reinvestments to improve the product.
Most importantly, Evolution enjoys a strong network effect!
With each new studio, region, game, and casino client, Evolution learns important insights. This helps the company improve all aspects of its operations. Design better studios, create more engaging games, and develop more effective hiring and training practices.
Where regulations permit, it can meet demand from multiple locations, essentially piggybacking on success in other regions.
Meanwhile, casino operators can launch multiple games, brands, and verticals without duplicating integration or compliance work.
Overall, through this process, Evolution’s platform becomes more attractive to casino operators, who want proven, highly profitable games.
3. An Online Casino Tool-Booth
One of the biggest advantages of Evolution’s business model is that they are effectively a tool booth in the global online casino industry.
Evolution is akin to Visa and Mastercard of the online casino industry!
Visa and Mastercard take a small cut of all global digital card payments. Similarly, Evolution takes a cut of the profits of the online casino industry.
Evolution runs a comparatively capital-light business, whilst online casinos are capital-heavy businesses!
Online casinos spend ungodly amounts of money on marketing to acquire and retain customers. Additionally, casinos such as MGM or Ceasars, need to maintain a certain brand image, which takes years of dedicated effort and costs billions.
But, most importantly, online casinos are on the hook to manage the cash flows of the gaming business and deal with the expensive regulatory burdens of running an online casino!
The casinos are responsible for paying out any gambler’s winnings, not Evolution.
They are also the ones dealing with licensing and other regulatory burdens of operating an online casino. Evolution helps them with software, but ultimately, if an online casino loses its license, it can’t operate, whilst Evolution can continue to serve other clients.
Evolution takes a cut of the winnings no matter what, without risking its own capital!
The company is a middleman that takes a cut of everything.
This puts Evolution in a unique position to generate lots of profits for its shareholders, with limited risk.
4. US Gambling Legalization
Las Vegas is the most famous casino city in the world. So, one would think that having the most well-known gambling city would mean that “obviously online gambling is legal”.
However, that is not the case. As online gambling is mostly illegal in the US.
As we can see in the picture above, online casinos are only legal in a handful of states in the northeastern US.
This posed a major challenge to Evolution’s business early on, but now this has become a huge opportunity!
As legalization rolled in, many large and notable US physical casinos and online sports betting companies partnered with Evolution, such as FanDuel and Caesar's Palace.
Since 2019, Evolution North American revenues have grown by 1,114% to $267M!
This is amazing growth by itself, but it is especially amazing in the context of regional legality.
I remind you that online casinos are only legal in a few US states and Canada.
If Evolution can 12X their revenues in just 5 years, with just these states, can you imagine the growth this company could achieve if more states legalize?
As of today, only 40M people in the 7 states have access to online casinos. It is not legal in any of the major states, but that is likely to change in the years to come. Many state finances are not great, and additional tax revenue from online gambling could provide a welcome boost to the budget.
Currently, there are active legislative procedures that could legalize online casinos in a few years in Maryland, Illinois, Indiana, and Wyoming. If that happens, around 26.5M people will gain access to online casinos.
Additionally, there have been some early discussions to maybe legalize online casinos in New York, Massachusetts, Ohio, Virginia, and other states. In these states, there is still a lot of uncertainty, so in the best-case scenario, it would be 5 or more years before operations can begin.
In any case, it seems the winds are shifting, so it is likely that in the next decade, there will be many US states that will legalise online casinos, possibly even tripling the TAM for Evolution!
5. International Gambling Legalization
The winds of legalization are not only going through the US, as countries all over the globe are exploring legalizing online casinos to increase revenues.
Online casinos became legal in Brazil on January 1, 2025, with Evolution already building a studio to serve this market.
With a GDP of $2.2T and a population of 211M, Brazil is Latin America’s largest country and most important economic center. This legalization will undoubtedly be a large contributor to Evolution’s growth in the region.
In addition to Brazil, recent legislative changes in Peru, Argentina, and Paraguay have made online gambling easier.
Furthermore, the new government in Mexico has started some discussions to create a simpler and more unified framework to regulate online casinos. Currently, only land-based casinos are allowed to operate online casinos. If changed, this would likely spur significant growth for the industry and Evolution.
Since 2022, Evolution’s revenues in Latin America have grown by 68%. Now that online gambling is legal in Brazil, revenue growth could accelerate.
In addition to Latin America, recently, there have been more discussions to legalize online casinos in various countries in Asia and Africa.
The Philippines is a country of over 120M people that is one of the fastest-growing economies in the world. Evolution is building a studio in the country to capitalize on the growing demand, thanks to recent legislative efforts.
Furthermore, there are ongoing discussions in the Sri Lankan parliament to legalize online casinos as well.
In any case, it is likely that we will see online casinos legalized in many new countries, driving demand for Evolution’s services!
6. Financials
There is no other way to say this, but Evolution’s finances are absolutely amazing. Investors will be hard-pressed to find a company with better margins.
Since 2015, Evolution has grown revenues with a CAGR of 44%, reaching EUR 2.2B in 2024.
At the same time, operating income grew with a CAGR of 57.5%, reaching EUR 1.4B.
This is a really strong growth that was driven by the legalization of new markets and the addition of new highly popular services, such as live game shows and unique RNG games.
Evolution has consistently delivered operating margins in the 60s and net income margins in the 50s, demonstrating the scalability of its model and the quality of its offering.
Casinos are not leaving, despite high fees, because they couldn’t make as much money on their own as they can with Evolution, as it is unlikely that they could replicate Evolution’s best and most engaging games.
Looking at the balance sheet, we see that Evolution has zero long-term debt and only EUR 76M in long-term leases for its studios. This is next to an almost EUR 1B in cash, demonstrating the strength of their balance sheet.
7. Valuation
As Evolution’s stock has fallen 33% in the last year, the company currently has a market cap of EUR 13.7B.
Evolution trades for a low P/E of 11, due to various issues it has had to deal with in the last year!
As the company operates in the “sin” industry, it is sensitive to various regulatory problems. Recently, some jurisdictions such as the UK, Romania, Sweden, and others have begun inquiries into certain Evolution’s practices.
Additionally, in Georgia, Evolution’s unionized studio employees went on strike to demand higher pay.
There are warranted fears that these issues could lead to slower top-line growth and lower margins due to higher costs.
In the picture above, I have placed certain valuation metrics.
And the first and the most glaring thing one notices is the poor result that Wall Street analysts expect the company to deliver in 2025.
In Q1 2025, Evolution announced that due to regulatory pressure and some proactive actions, the company is taking steps to “ring-fence” certain markets. Essentially, the company pulled its services from some operators who operate in the legal gray zone.
This led to revenue growth slowing down to 3.9%, and EBITDA margin decreasing from 69% to 65.7% Y/Y.
Analysts expect that this will cause 2025 revenues to decline by 3% and net income by 14.3%. However, I find these estimates overly pessimistic, as this is what the CEO said in the Q1 press release.
“We believe that the actions we are taking also will impact the second quarter, but that the second half of the year will be stronger. We therefore keep our full-year estimate of an EBITDA margin of 66 to 68 percent. In this context, I would like to reiterate our stance that we will always prioritise growth over margin, which is why we are continuing to invest also in times when we see short-term disturbances to our business.” Martin Carlesund, Evolution CEO, Q1 2025 Earnings Report
Let’s see if the tone changes in the Q2 report, but for now, these statements indicate confidence in the business. The CEO expects things to improve in the second half of the year, whilst analysts expect the opposite.
In any case, Evolution seems to be actively priced!
In the next 3 years, it will grow revenues and cash flow by around 15-20%, all while paying a 4% dividend and buying back 4% of the shares.
P/E of 11 seems more than fair, and leaves room for extra upside if the company beats estimates and multiples expand.
Valuation Model
Let’s assume that Evolution grows revenues with a 9% CAGR till 2030.
Operating margins remain at 64.1% as in 2024.
Tax remains similar.
We get to a net income of around EUR 2B, and an increase of 61% from 2024!
Share count decreases by an average of 3% per year.
The company trades for a P/E of 12.
The result is a market cap of around EUR 24B and EUR 136.89 per share.
That is an upside of 116% to today’s share price!
However, even if there is a modest multiple expansion to 15, we get to a 170% upside.
I believe that these assumptions are more than reasonable, potentially making Evolution quite an attractive investment opportunity.
8. Conclusion
While Evolution operates in a highly competitive “sin” industry, thanks to its technology and product-first approach, the company has achieved financial results unprecedented outside the software industry.
Revenues have grown by almost 30X in just a decade, with an operating margin of above 60%!
The company has achieved these results thanks to clear competitive advantages stemming from its scale, product innovation, and network effects. While high barriers to entry and significant switching costs keep competitors at bay and customers in check.
Most importantly, a tailwind of coming regulatory changes positions Evolution to benefit from increased demand for its services.
Many states in the US, such as Illinois, Indiana, and Maryland, are actively exploring legalization. Whilst countries such as Brazil, Argentina, and the Philippines have recently expanded online casino legislation.
Lastly, as the valuation model showed, Evolution seems to be attractively priced considering its future prospects.
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Don't forget Martin Carlesund bought 100,000 shares this month. Good stuff 👏👏
No comment on the cyber attacks in Asia?