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This is a follow-up to the excellent and comprehensive post by EVBigMacMeal from December 2024: https://www.shrewdm.com/MB?pid=183243846. I won’t repeat the points made there, but will instead provide an update on the current landscape (sorry, still a long post).

2025 was a challenging year for the company. Evolution AB is currently pivoting its focus toward North American and Latin American markets while navigating regulatory "ring-fencing" in Europe and cybersecurity headwinds in Asia.

Financial Performance:
• Revenue: Remained flattish throughout the year.
• ROE is high, ROCE roughly 31%. Evolution remains highly capital-efficient, though ROCE is down from previous peaks (~34%) due to heavy investments in new studios in Brazil and the U.S.

Market Sentiment:
The stock went nowhere in 2025; it currently hovers around $60 USD with a P/E of approximately 10. Analysts generally dislike the stock, with a consensus target of $57 USD, signaling anticipation of further decline. While the chart looks objectively poor and regulatory/cybersecurity risks persist, I see a tremendous opportunity where others see a "value trap."

Why I Like the Current Setup:
1. Aggressive Insider Buying. I am encouraged by management's optimism. In June 2025, CEO Martin Carlesund made a major statement by purchasing 100,000 shares on the open market. He paid approximately $6.92 million (SEK 67M) at an average price of roughly $69.50. Seeing a CEO buy significantly above the current market price is a strong conviction signal.

2. High-Conviction Warrant Programs: Unlike many U.S. companies that grant stock options for free, Evolution utilizes a Warrant Program. Senior management and key employees must actually purchase these warrants, which are typically priced at a significant premium to the current market price.
• Subscription Rate: The most recent participation rate was an impressive 97% (1,995,865 warrants subscribed out of 2,050,000 issued).
• Trend: This is a notable increase from the 80% participation rate in the previous period, suggesting that those closest to the operations are increasingly bullish on a three-year recovery.

3. Strategic Capital Allocation (Dividend Cut): Most importantly, the company has suspended its dividend. In March 2026, the board broke its long-standing "50% payout" policy—a move I personally welcome. I prefer businesses that reallocate capital to compound growth rather than paying it out. This capital is now being diverted toward:
• Aggressive Studio Expansion: Building the "local studios" required by new regulations in Brazil and the U.S.
• Share Buybacks: Supporting a massive stock repurchase program at what appear to be depressed valuations.

4. Galaxy Gaming Acquisition: This is a critical "missing piece" in Evolution's North American puzzle. While the deal is small in terms of dollar value (~$85 million), its strategic weight is immense for the following reasons: Obtaining individual state licenses in the U.S. is a notoriously slow and expensive "colonoscopy" of a company’s history. By acquiring Galaxy, Evolution gains an established regulatory footprint. Not sure how much this helps – but it will help some. Unfortunately, the acquisition has been delayed to July 2026 due to intense scrutiny from Nevada regulators. Until they approve, a "regulatory cloud" hangs over the stock, keeping the valuation (P/E) suppressed.

Full Disclosure: I have been invested in Evolution for a long time. I rode the position up to $200 USD during the Covid crisis (boom for the company) and have held through the steady decline since (I am a "sit on my ass" kind of investor, follwing the advice of you know who). Despite the volatility and disappointing growth, the underlying capital efficiency remains world-class. If you disagree with my assessment, please shoot. Confirmation bias is one of the biggest threats when investing, and I'm keen to hear the bear case.

Nice. I don't know anything about them. (or didn't, till reading these posts a few minutes ago and checking what I could at my data providers)

The financial metrics do look very nice, but "analyst consensus" seems to be that earnings will be flat for the next couple of years, as they were in the last couple. On the other hand, if the reported trailing and forward P/E figures in the 10-11 range is both true and sustainable, who needs growth? The only prerequisite then is that the business activity have longevity.

Rather unusually it looks like the stock price has done nicely [only] since the dividend cut. Usually one sees the reverse.

I might just pick up a little shareholding while I try to find the time to read up on them in more depth. You know, just as a pure gamble...

Jim

The overall addressable market for global online gambling is currently expanding at a CAGR of nearly 12%, at least according to this source: https://www.grandviewresearch.com/horizon/outlook/... . If Evolution AB as B2B supplier to this market can match or exceed this industry growth, the recent dividend cut becomes a compelling reason to buy the stock.

The math is straightforward: when a business consistently generates a Return on Invested Capital (ROIC) of 30%+, every dollar paid out as a dividend is a dollar that cannot be reinvested at that elite rate. Chris Mayer, author of "100 Baggers" and a long-time supporter of Evolution, was historically critical of the company’s 50% dividend payout policy, viewing it as a "leak" in the company’s compounding machine.

While I believe Evolution is well-positioned to reignite growth—particularly through expansion in the U.S. and Latin America—we must acknowledge that ROIC will likely face slight compression. This is a natural consequence of the higher "cost of doing business" today, driven by the shift toward localized studios, increased cybersecurity requirements, and the regulatory complexities of new markets (especially in the U.S.).

The math is straightforward: when a business consistently generates a Return on Invested Capital (ROIC) of 30%+, every dollar paid out as a dividend is a dollar that cannot be reinvested at that elite rate.

Well, yes, investing internally at high rates is great. But. It hasn't been in this case lately, nor is it seemingly expected soon.

Now maybe there are very good reasons that the capital they have retained and deployed in the last few years has led to no observable [yet] increase in value per share. A rough patch, expensive (and expensable) spending that has yet to pay off, one time loss, whatever.

But, if you can't identify a good reason to defend that thesis, the other viewpoint is that the capital they have deployed internally is perhaps acting as the equivalent of maintenance capex...money they have to spend every year just to stay in place.

As mentioned, I know pretty much nothing about the firm, so I have no idea which view makes the most sense. Really. But one has to come up with reasons to believe they are at a particular point on the spectrum between those two situations. Or conservatively assume the default bad situation, that they are ex growth. Again, I am very much NOT saying that is the case, it seems unlikely at first blush, but then you have to have a well defended explanation for the flat stretch.

Put crudely, if the internal capital allocation is so remunerative and such a great idea, why aren't earnings rising? What has been holding back the bottom line, is it transient, and how good is the evidence that it's transient?

Jim

To address your point crudely but accurately: Earnings aren’t rising because Evolution is currently paying the "bill" for its own long-term survival.The company is undergoing a forced structural migration.

In 2025/2026, Evolution isn't just growing; it's rebuilding its foundation to satisfy regulators while fighting off the most aggressive external attacks in its history.

While revenue was essentially flat in 2025 (+0.2%), Net Income even fell. This "bottom-line bleed" is driven by three specific factors:

- The "Ring-Fencing" Cost: Evolution proactively cut off "gray market" access in Europe to protect its core licenses (specifically under UK and German pressure). CEO Martin Carlesund noted that this dropped "channelization" to 50% in some markets—meaning they effectively turned off half their potential revenue in those areas overnight to stay "clean" for U.S. regulators.

- Operating Expense Creep (+8.3%): To build the "local studios" in Brazil and the U.S., Evolution had to hire thousands of people before those studios were fully revenue-generating. In 2025, they increased their table count to 2,000 (up from 1,700), but the revenue from those new tables hasn't scaled yet.

- The Cybersecurity "Arms Race": In Asia (historically 40% of revenue), competitors and "criminal elements" have been high-jacking Evolution’s streams. Evolution’s counter-measures in 2025 were actually too effective—they accidentally blocked legitimate players, causing a significant revenue dip that they are only now beginning to recover.

Is it transient or structural?

I believe transient. Once the Brazil and New Jersey "mega-studios" are at capacity, the hiring spree slows and margins normalize. The Asia-Cyber attacks have decreased. Revenue in Asia returned to growth in Q4 2025/Q1 2026 after security patches were refined. Quote from CEO's comment for Q4: "Zooming in on the fourth quarter, Asia has turned back to growth compared to the third quarter, signaling some progress in our hard work to combat cyber criminality. The progress is slow, methodical, and very important. Our studio in the Philippines is also continuing to develop nicely." Not enthusiastic, but going in the right direction, in my mind. And finally Europe "ring-fencing": This is a "one-off" purge. Once the unregulated revenue is gone, the remaining revenue is higher quality and legal. Regulation is a double-edged sword: while it is an immense operational burden for Evolution, it also creates a formidable barrier to entry for competitors.

But again: Risks remain, and all this probably does not qualify as "evidence" that this is transient - it is just my best guess (and remember: the management's best guess, the 400+ key contributors who have bought the warrants).

Uncertainty remains: Some days ago I have read an article that Treasury Secretary Scott Bessent and Fed Chair Jerome Powell convened Wall Street leaders in an emergency meeting addressing Anthropic’s latest model release. Could Anthropic become a threat to Evolution's business model? Yes, I guess.

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