Social Casino Success Amid Industry Woes, But Economic And Execution Risks Lurk

Key Takeaways

• Expansion in direct consumer payment options and the acquisition of SuprNation indicate strategic moves to increase profitability and diversify gaming portfolio.
  
• Introduction of new features and effective market share capture in declining industries showcase operational success and positive outlook on revenue and net margins.
  
• Heavy reliance on a single game and ambitious expansion plans carry significant risks for revenue, profitability, and market share amid challenges in user acquisition and R&D efficiency.

Catalysts

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

• Continued year-over-year revenue growth in the social casino/free-to-play games segment, indicating effective market share capture and outperformance in an industry facing overall decline. This suggests a positive impact on future revenue growth.
  
• The introduction of new meta features for DoubleDown Casino has driven increases in key performance indicators like ARPDAU, average monthly revenue per payer, and payer conversion rate, which supports expectations of enhanced player engagement and monetization, positively affecting future revenue and net margins.
  
• Expansion of direct consumer payment options has begun to notably benefit profitability, indicating an operational strategy that could directly enhance net margins through increased sales efficiency and reduced reliance on third-party platforms.
  
• Ownership of SuprNation with Q2 revenues exceeding expectations suggests successful integration and operational efficiencies, which could lead to higher than anticipated future growth in the iGaming business, impacting overall revenue growth.
  
• Strong balance sheet and cash flow generation from operations, enabling financial flexibility for organic growth and potential mergers and acquisitions, which could further diversify the company’s gaming portfolio and revenue streams, positively affecting long-term revenue and earnings growth.

Assumptions

• Analysts are assuming DoubleDown Interactive's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.9% today to 30.2% in 3 years time.
• Analysts expect earnings to reach $111.8 million (and earnings per share of $2.3) by about September 2027, down from $115.9 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 10.6x on those 2027 earnings, up from 5.7x today. This future PE is lower than the current PE for the US Entertainment industry at 19.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Risks

• The reliance on a single game, DoubleDown Casino, for a significant portion of revenue growth could pose a risk if user engagement declines or if there are any disruptions to the game's operations, potentially impacting revenue and net margins.
  
• The company's ability to continue outperforming the social casino industry in a context where the overall market segment is experiencing a decline could be at risk if market conditions worsen or if competitors introduce more compelling offerings, impacting revenue growth and market share.
  
• The operational integration and scale-up of SuprNation, the iGaming business, present execution risks, especially as the company pulls back on player acquisition spending to optimize for profitability, which could affect revenue growth and cash flow generation from this segment.
  
• A substantial portion of the company's strategy hinges on successful user acquisition and R&D spend efficiency. Any missteps in these areas could lead to lower-than-expected return on investment, impacting operating margins and profitability.
  
• The company's plans for expansion through M&A and the introduction of new games carry inherent risks related to execution, market acceptance, and integration. Failed efforts or delays could impact expected revenue streams and drain financial resources, negatively affecting net cash flows and earnings stability.

Valuation

• The analysts have a consensus price target of $19.31 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 $16.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $370.7 million, earnings will come to $111.8 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $13.35, the analyst's price target of $19.31 is 30.9% 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.