Regulatory Hurdles Will Constrain iGaming Expansion Yet Spark Slight Optimism

Key Takeaways

• Regulatory changes, higher compliance costs, and intensifying competition may restrict DoubleDown's expansion and put sustained revenue growth and margins at risk.
  
• Heavy reliance on a shrinking social casino portfolio and challenges in player retention threaten future revenue stability and earnings resilience.
  
• Declining user engagement, rising acquisition costs, and regulatory risks threaten revenue growth and margins, while limited success with new games increases dependence on a maturing core portfolio.

Catalysts

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

• Although DoubleDown's expansion of its iGaming business, SuprNation, demonstrates strong growth potential in markets like the U.K. and Sweden-which could benefit from the broader shift toward legalized online gaming and rising global digital adoption-the company faces intensifying regulatory scrutiny and potential tightening of gambling laws that could raise compliance costs and restrict expansion, putting medium
• to long-term revenue growth at risk.
  
• While demographic trends such as the increasing discretionary income of an aging population and Millennials'/Gen Z's preference for digital entertainment should boost the addressable market and user engagement for DoubleDown, the surge in alternative digital entertainment options like streaming, virtual reality, and e-sports may continue to limit player acquisition and retention, potentially dampening average revenue per user and impeding sustained topline growth.
  
• Despite ongoing investments in marketing and advanced analytics to boost user monetization and scale their iGaming operations, the sharp rise in customer acquisition costs-driven by aggressive competition from sweepstakes and other gaming formats-puts persistent pressure on net margins that may outweigh gains from optimization or scale.
  
• Although disciplined management of operating expenses and strong conversion of revenue to free cash flow have supported robust profitability and a healthy balance sheet, DoubleDown's over-reliance on a shrinking social casino portfolio, coupled with challenges in successfully launching new proprietary titles, heightens the risk of further user churn and stagnating revenues, which could erode future earnings resilience.
  
• While DoubleDown is actively pursuing international market expansion and diversification through M&A, ongoing industry consolidation and greater platform fees or ecosystem restrictions from dominant app stores threaten to squeeze net margins further and make it harder for DoubleDown to compete at scale, potentially constraining both future earnings and free cash flow growth.

DoubleDown Interactive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DoubleDown Interactive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DoubleDown Interactive's revenue will grow by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 34.9% today to 32.2% in 3 years time.
• The bearish analysts expect earnings to reach $111.9 million (and earnings per share of $2.26) by about August 2028, down from $117.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 3.9x today. This future PE is lower than the current PE for the US Entertainment industry at 30.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.63%, as per the Simply Wall St company report.

DoubleDown Interactive Future Earnings Per Share Growth

Risks

• The social casino business reported a 12% year-over-year revenue decline in the most recent quarter, reflecting long-term secular stagnation and heightened competition, which could negatively impact future revenue growth and ultimately reduce earnings.
  
• Average daily and monthly active users in the social casino segment continued to shrink, suggesting potential ongoing user attrition and possible over-reliance on a mature portfolio that may erode topline revenue and threaten net margins if player churn is not offset by new hit titles.
  
• Rising user acquisition costs, especially cited due to aggressive spend from sweepstakes competitors, are putting pressure on customer acquisition efficiency and could further squeeze net margins if marketing investment fails to deliver proportional revenue gains.
  
• Regulatory risk and tightening scrutiny in key iGaming markets such as the UK and Sweden-where the company is currently seeing SuprNation's growth-pose long-term risks of increased compliance costs or restricted operations that could undermine revenue and profitability.
  
• The company's disciplined, data-driven approach to new game development includes abandoning projects that fail to meet targets, as shown with the cancelled match-three game; a lack of successful new launches could hamper diversification efforts and leave the business overly exposed to existing categories, risking both future revenue growth and earnings resilience.

Valuation

• The assumed bearish price target for DoubleDown Interactive is $16.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of DoubleDown Interactive's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $347.3 million, earnings will come to $111.9 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 9.6%.
• Given the current share price of $9.32, the bearish analyst price target of $16.0 is 41.8% 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.