We came across a bullish thesis on Double Down Interactive (DDI) on Value Degen’s Substack by Unemployed Value Degen. In this article we will summarize the bulls’ thesis on DDI. Double Down Interactive share was trading at $14.05 as of Sept 6.
A closeup shot of slot machines and a player nervously waiting for the spin to stop.
Double Down Interactive (DDI), a U.S. mobile gaming company acquired by a British firm and later sold to a South Korean mobile gaming company, went public in New York in 2021 at the height of the COVID-19-driven market bubble. Unlike traditional games, DDI focuses on slot machine-style apps, tapping into the growing popularity of gambling on smartphones. Despite the ethical concerns about the addictive nature of these games, DDI has maintained a sticky customer base, with average users spending over $200 per month. The company’s conversion rate — from players who download the game to those who make in-app purchases — has increased from 5.2% in 2019 to 6% in 2023.
The company’s business model is heavily reliant on both organic growth through marketing, and inorganic growth via acquisitions. DDI’s recent acquisition of SUPRNATION, a Malta-based gaming company, grants access to the $25 billion European gaming market, expanding its presence in the UK, Sweden, and Estonia. However, the company’s growth faced a significant challenge in 2018 when it was sued in Washington state for violating gambling laws. DDI settled the case for $145 million, while its former owner, International Game Technology (IGT), paid $269 million. This settlement temporarily strained DDI’s cash flows and limited growth investments in 2022 and 2023.
Despite these setbacks, DDI’s underlying financial health remains strong. The company’s operating cash flow, excluding the settlement costs, has grown by 11.4% per year since 2019, while overall revenue has increased by approximately 3% annually. With the lawsuit settlement behind them and recent acquisitions bolstering growth prospects, DDI is positioned for a significant valuation rerating. The company’s 2024 operating cash flow is projected to reach $120 million, up from $20.8 million in 2023, suggesting substantial upside potential.
As quantitative models begin to recognize DDI’s full and growing cash flows, a rerating is likely. Gaming companies trade at a price-to-earnings ratio of 10 to 50, and even a conservative multiple of 10 would imply a market capitalization of $1.2 billion, nearly double the current valuation of $599 million. With a strong management team, a healthy balance sheet, and a sticky customer base, DDI offers a compelling investment opportunity. However, risks such as competitive obsolescence and potential legal challenges remain. Investors should consider a strategic entry point, possibly waiting for dips to fully capitalize on this growth story.
Double Down Interactive is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 2 hedge fund portfolios held DDI at the end of the second quarter which was 2 in the previous quarter. While we acknowledge the potential of DDI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DDI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.
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