Adding DoubleDown Interactive To My Value Portfolio (NASDAQ:DDI)

Immediately I clarify why I’ve added a small place in DoubleDown Interactive (NASDAQ:DDI) to my worth portfolio. However earlier than I talk about the corporate itself, let me say that a part of the reasoning is macro, as I imagine that each small-cap shares and worldwide shares have enormously lagged behind the high-flying tech and large-cap shares which have led the marketplace for a number of years now. Beneath are 5-year charts of the Russell 2000 and the Korean Composite Index for some perspective.

DDI is a South Korean firm with a comparatively long-historied, however area of interest enterprise of offering social playing video games for cellphones and different gadgets. Their most up-to-date investor presentation has a couple of slides that assist perceive this enterprise.

First, we see the digital nature of this software program, which is all supplied without spending a dime (however with alternatives for DDI to monetize customers).

Importantly, DDI tends to have very robust retention, as will be seen from this income graph which reveals the overall revenues primarily based on the 12 months the person was first acquired.

As proven by that chart and the next one, revenues have been comparatively regular, however barely declining over time. The one quarter of huge money losses got here from a settled lawsuit that has now been paid off. Here’s what the corporate mentioned in its earnings launch with respect to that matter:

Internet money flows utilized in working actions for the second quarter of 2023 have been $56.8 million, in comparison with web money flows offered by working actions of $21.1 million within the second quarter of 2022. The lower was primarily as a result of remaining cost of $95.25 million in the direction of the Benson litigation settlement. Excluding such cost, web money flows offered by working actions was $38.4 million.

New Acquisition as Catalyst

One of many causes I am lengthy the inventory is as a result of, resulting from a latest acquisition, DDI could be very prone to embark on a brand new progress path. That is the catalyst to start out realizing among the worth on this heretofore “worth entice”. (I talk about valuation additional under.)

Particularly, DDI lately closed on the acquisition of a real-money i-gaming firm, SuprNation, which operates primarily in Sweden and the UK. Right here is how the corporate described the logic behind the acquisition:

“The acquisition of SuprNation is a vital step in establishing our presence in new high-growth gaming classes which are complementary to our core social on line casino operations the place we will leverage our sport builders’ experience in sport creation and our advertising platform to scale the enterprise profitably,” mentioned In Keuk Kim. “SuprNation has a powerful and dependable participant base in a number of European markets reminiscent of Sweden and the U.Okay., and we anticipate so as to add extra regulated jurisdictions over time. We’re assured in our capability to leverage our broad portfolio of on line casino sport content material and improvement experience to additional broaden SuprNation’s differentiated on-line on line casino gaming experiences, reminiscent of their flagship title, Duelz.com, to drive progress within the enterprise.

“As well as, to anticipated income progress alternatives which is able to profit from each DoubleDown’s and SuprNation’s important participant engagement and monetization experience, we anticipate to understand synergies in our participant acquisition actions in addition to different prices reminiscent of advertising, again workplace in-sourcing and potential native Apple/Android app improvement. We’re delighted to welcome the SuprNation staff members to DoubleDown and stay up for working collaboratively on our initiatives to drive progress throughout the enterprise.”

The corporate’s progress plan is now primarily based on this (inorganic) acquisition and several other natural enlargement initiatives:

The acquisition of SuprNation, which occurred at about 1.43X gross sales ($35M / (4/3*$18.3M)), ought to permit the corporate to meaningfully leverage its present ability set to broaden within the real-money i-gaming world. Here is somewhat extra data on the SuprNation transaction:

Money on Hand

DDI has roughly 50M shares excellent, money of $184M (with short-term investments roughly equal to present liabilities). Thus it has about $3.68 of money per share versus its share worth of $8.19. For my part, this massive money place considerably de-risks the inventory and permits traders the boldness that the corporate can have adequate funds accessible to pursue its technique and progress plans.

Valuation

Equally, DDI valuation metrics are exemplary. Here is a snapshot from In search of Alpha’s very useful valuation tab. Be aware specifically the EV/gross sales, EV/EBIT and P/B ratios:

These metrics are self-explanatory as to why I take into account DDI a premier valuation play.

Quant Scores

I additionally all the time verify In search of Alpha’s quant scores when evaluating a inventory, and once more, they’re stellar for DDI.

Choices

One strike towards DDI is that it would not at the moment have choices listed.

Dangers

I feel the money readily available and valuation metrics enormously de-risk DDI, however there may be actually a threat of DDI persevering with to behave as a worth entice. If the latest acquisition would not return the corporate to a progress path, then there may be threat that the inventory simply retains trending down. (I shall be watching the expansion trajectory intently for the following 18 to 24 months, and will exit my place if there aren’t any uptrends.)

There are additionally new regulatory dangers related to getting into the real-money i-gaming subject. Particularly, DDI relies in South Korea, however its acquisition operates in Europe, so the corporate management will not be very acquainted with, or ready for, European rules.

Abstract

I imagine that DDI has substantial underlying worth and a doubtlessly significant progress path which warrants it being included in my valuation portfolio. All positions within the portfolio are small (lower than 2% of the account) which permits me to be affected person with all these firms. I’ll in all probability give the corporate 18-24 months to execute, at which level I’ll revisit and re-assess my place.