Expanding iGaming And Social Casino Could Spark Growth But Faces Margin Compression And Scaling Risks

Key Takeaways

• Expansion through SuprNation and focus on meta features aim to drive growth and improve net margins.
  
• Investment in mobile games and strategic M&A target revenue diversification and future growth.
  
• Rising player acquisition costs and potential integration challenges could impact profitability while transitioning monetization models may limit short-term growth.

Catalysts

Engages in the development and publishing of casual games and mobile applications in South Korea.

• DoubleDown Interactive is expanding its iGaming operations through SuprNation, with plans to leverage their product development expertise to enhance profitability, which could drive top-line growth and improved net margins.
  
• The continuous release of new meta features in the social casino business is expected to increase player engagement and monetization, directly impacting revenue growth.
  
• Focus on direct-to-consumer revenue streams as a strategic effort to improve gross margins could positively affect earnings.
  
• The company is investing in the development of new mobile games and exploring M&A opportunities, aiming to diversify revenue streams and drive future growth.
  
• Optimizing spending on player acquisition while maintaining profitability in their social casino app and SuprNation operations should enhance cash flow generation and net margins, positively impacting long-term earnings.

DoubleDown Interactive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DoubleDown Interactive's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.3% today to 31.9% in 3 years time.
• Analysts expect earnings to reach $116.4 million (and earnings per share of $2.34) by about November 2027, up from $114.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2027 earnings, up from 6.4x today. This future PE is lower than the current PE for the US Entertainment industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

DoubleDown Interactive Future Earnings Per Share Growth

Risks

• Rising player acquisition costs, influenced by high investments from sweepstakes game publishers, could impact the company’s net margins and profitability if not managed carefully.
  
• The company's strategy to carefully transition to direct-to-consumer models in monetization aims to avoid user friction; however, taking time could limit short-term revenue and profit growth.
  
• The potential integration challenges and initial costs associated with merging SuprNation and social casino assets might lead to increased operating expenses and affect net earnings.
  
• The company acknowledges more challenging year-over-year revenue comparisons moving forward, suggesting potential pressure on maintaining current revenue growth rates.
  
• SuprNation's relatively small market presence means there could be significant execution risks associated with scaling, which could impact future earnings and revenue projections.

Valuation

• The analysts have a consensus price target of $21.75 for DoubleDown Interactive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $364.8 million, earnings will come to $116.4 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $14.74, the analyst's price target of $21.75 is 32.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.