Expanding Marketing Efforts Will Extend Reach In UK And Sweden, But Industry Decline And Rising Costs Pose Challenges

Key Takeaways

• Strategic marketing and new meta features in DoubleDown Casino aim to boost player retention and revenue growth in key regions.
  
• New game launches and potential M&A activities are expected to diversify revenue streams and bolster market position.
  
• Rising player acquisition costs and reliance on new game categories present significant challenges to DoubleDown Interactive's revenue growth and profitability.

Catalysts

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

• Investment in marketing efforts for SuperNation, particularly in the U.K. and Sweden, is expected to drive significant market share growth in these regions, potentially increasing revenue.
  
• Efforts to introduce new meta features and enhancements in DoubleDown Casino aim to improve player retention and monetization, which could lead to higher revenues and improved net margins.
  
• The development and expected launch of new games, such as the match three style game currently in beta, provide potential for revenue diversification and earnings growth.
  
• Ongoing assessment of M&A opportunities to expand into new gaming markets could lead to increased revenue streams and strengthen the company's market position and profitability.
  
• The shift to direct-to-consumer revenue models is anticipated to enhance profitability in the social casino operations by offering players alternative purchasing methods, improving net margins.

DoubleDown Interactive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DoubleDown Interactive's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.3% today to 32.3% in 3 years time.
• Analysts expect earnings to reach $117.5 million (and earnings per share of $2.37) by about March 2028, down from $124.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 3.8x today. This future PE is lower than the current PE for the US Entertainment industry at 22.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

DoubleDown Interactive Future Earnings Per Share Growth

Risks

• The social casino industry is forecasted to experience a revenue decline in 2025, which could challenge DoubleDown Interactive in maintaining or growing its revenue in this category.
  
• The rising cost of acquiring new players, due to significant investments by sweepstakes games publishers, could pressure net margins if player acquisition costs increase faster than revenue growth.
  
• The company's shift from GAAP to IFRS accounting standards could impact investors' perception of financial consistency and comparability, potentially affecting earnings visibility.
  
• Growth is heavily reliant on the successful expansion and integration of acquired businesses like SuperNation, which poses execution risks that could impact future revenue and profitability.
  
• DoubleDown's reliance on new game categories, such as casual match-three games, involves significant R&D and marketing investments, and failure to successfully launch or monetize these products could adversely impact earnings.

Valuation

• The analysts have a consensus price target of $20.25 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 $23.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $364.1 million, earnings will come to $117.5 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $9.46, the analyst price target of $20.25 is 53.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.