DDI - DoubleDown: Top Online Games And Quite Undervalued

Summary

• DoubleDown does have a lot of expertise in designing casino emulator games globally.
• If management continues to be successful in the assessment of data traffic, and user acquisition cost does not increase due to competition, free cash flow will likely grow.
• The company’s fundamental pillars include constant growth of mobile and entertainment platforms, and more apps to manage payment processing.

DoubleDown Interactive Co., Ltd. ( DDI ) reports casino games that are pretty well ranked among the app industry, and business growth is simply impressive. I believe that further successful assessment of data traffic and development of casino emulators will likely bring free cash flow growth. I also see risks from regulators, failed M&A acquisitions, or higher user acquisition costs. With that, DDI looks too cheap at its current market price.

DoubleDown Reports Business Growth, And Market Analysts Continue To Be Optimistic About The Company's Future Figures

Since 2015, DoubleDown Interactive has been in the top 20 Apple Store ( AAPL ) ranking for mobile games. In addition, it remained among the podium of the three most used casino emulator games globally for four years. These numbers along with having been, according to its own statements, the first company to organize social game tournaments with casino machines show the size of this corporation.

Entirely dedicated to the design of video games for mobile devices and computers, mainly casino games in addition to adventure and chance games, the company was founded in 2010. It immediately entered Facebook's (META) video game area, allowing in just one year to be the fourth most recommended video game to use within the platform.

Analysts expect 2024 net sales of $340 million and a net sales growth of 3.66%. In addition to an EBITDA of $104 million and an operating profit of $97.5 million, operating margin would stand at 29.70%. I believe that the expectations are quite beneficial.

2024 Free cash flow is expected to be close to $77.3 million together with 2024 FCF margin of 22.74%. I tried to use a FCF margin that is close to that reported by other analysts, so I believe that noting their expectation appears beneficial.

Balance Sheet

As of September 30, 2022, DDI reported cash of $310.468 million, in addition to accounts receivable of $19.916 million and total current assets of $338.031 million. The current assets/current liabilities ratio is close to 1x-2x, so management may not fear a liquidity crisis any time soon.

Intangible assets are worth $50 million, with goodwill of $633.965 million and total assets worth $1 billion. The asset/liability ratio is close to 4x-5x, so I believe that the company's financial situation is solid.

Liabilities include accounts payable of $14.743 million, a loss contingency of $145.250 million, and total current liabilities of $171.404 million. Long term borrowings were equal to $34.848 million, with non-current liabilities of $7.358 million and total liabilities of $216.945 million. The company's net debt is negative, so I wouldn't be afraid of the company's financial obligations.

More Successful Development Of Casino Emulators, Data Traffic, And Data Analysis Could Imply A Valuation Of $18-$19 Per Share

DoubleDown shows a smart strategy in the development of its business model within the market of digital applications and games, specifically in casino emulators, including roulette, jackpot machines, and card games among others. In my view, the company appears to be one of pioneers in the industry. Thus, I believe that management owns specific knowledge and a capacity for maneuver within the industry, above any start-up or minor company in the field of video games.

The company's fundamental pillars include constant growth of mobile and entertainment platforms, more apps to manage payment processing, an immediate flow of capital from users to companies, and new payment platforms. Considering how successful these pillars were in the past, I would expect further revenue opportunities.

The business model and the company's income are subject to the download and use of its video games. In addition, user data traffic and data analysis play a large role in this profit to generate more specific products in the niches for the players to market this data to other companies that in the same way use these to weave their commercial strategies. Moreover, the possibility of introducing third-party advertisements within its games is an author's mark in the development of this business model. Under my conservative case scenario, third-party advertisements and data analysis will likely push future FCF generation.

Besides, under this case, I also include the likelihood of generating new games with a massive platform of users, with high-quality content that favors attention and entertainment, extending the longevity of the company's existing games.

Finally, under this case scenario, I would expect that some new acquisitions could bring more revenue growth and FCF generation. Let's keep in mind that management acquired several targets in the past, and is currently pursuing additional strategic acquisitions.

We have grown the business since the acquisition of DDI-US from IGT in 2017 and we intend to continue to expand the scope and geographic relevance of the games we provide. Source: 20-F

In the future, we may pursue additional strategic acquisitions to further expand our operations. Our ability to succeed in implementing our strategy will depend to some degree upon our ability to identify and complete commercially viable acquisitions. We cannot assure that acquisition opportunities will be available on acceptable terms, or at all, or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Source: 20-F

My financial model includes 2030 net sales of $448 million and 2030 net sales growth of 4.70%. In addition to an EBITDA of $137 million with 2030 EBITDA margin of 31%, I used 2030 free cash flow of $96 million accompanied by 21% FCF margin.

If we assume a WACC of 8.67% , the NPV of future free cash flow would be $512 million. 2030 terminal value would stand at $273 million with an EBITDA multiple of 2x. Finally, the implied enterprise value would be $785 million. With cash of $310 million and debt and loss contingency of $179 million, the implied equity would be $916 million. Finally, the implied fair price would be close to $18.5 per share with an internal rate of return of 6.2%.

There are several risks that may bring revenue growth down, or may lower expected FCF margins. First of all, most users depend on a platform through the digital stores of Apple or Android ( GOOG ). These platforms are subject to changes in trends and technological developments. If the quality of their services is lower, the company's revenue growth may suffer because the number of users and traffic received by DoubleDown would lower.

Other risk factors, in addition to the obvious circumstances in relation to its need to renew the strategy of attracting new customers as well as to generate more accessibilities within video games in exchange for payments for its users, are government restrictions in relation to the collection and use of user data.

Finally, there are risks from competitors and other existing casino emulators. More games out there and competition could increase the investment necessary to bring new users to DoubleDown. Besides, DoubleDown's content may become unsuccessful, and the company's ability to monetize new users may lower. As a result, I believe that DoubleDown's future free cash flow would diminish.

We expect that the overall number of our customers and the amount they are willing to invest in our games will fluctuate from time to time. The rate at which we acquire paying players may be affected by increased competition, general economic conditions, or other factors. In addition, we may not be successful in providing sufficient incentives and creating engaging content to retain our existing customers and attract new customers. If we are unable to successfully acquire, retain, and monetize players who make purchases in our games, our operations and financial condition will be adversely affected and our profitability may decline. Source: 20-F

Under this scenario, I assumed 2030 net sales of $292 million with a net sales growth of -2.5%, accompanied by an EBITDA of $89 million and an EBITDA margin of 31%. I also included 2030 free cash flow of $7 million together with the FCF margin of 3%.

If we include a WACC of 20%, the net present value of future free cash flow would stand at $268 million. Now, with an EV/EBITDA of 0.5x, the 2030 terminal value would stand at $45 million. Moreover, the implied enterprise value would stand at $313 million, and I foresee an equity valuation of $444 million. Finally, the fair price would stand at $9 per share, and the internal rate of return would be -0.68%.

My Takeaway

DoubleDown does have a lot of expertise in designing casino emulator games globally, and most expectations include significant free cash flow generation in the coming years. In my view, if management continues to be successful in the assessment of data traffic, and user acquisition cost does not increase due to competition, free cash flow will likely grow. Even considering risks from regulators or failed new games, in my view, the current stock price is below DoubleDown's fair price.

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