Will this Gaming Company IPO have any long-term value?

The Offering

Company Overview

DoubleDown Interactive Co., Ltd., is a Republic of Korea based – online gaming company. The company is engaged in developing and publishing of digital games on mobile as well as web-based platforms. The company is among the early pioneers in the social casino gaming and among the early publishers who positioned their social casino game on Facebook, back in 2021, with the release of DoubleDown Casino. Also, DoubleDown Casino game is amongst the top grossing game on Apple Store since 2016.

The company was established in 2008 in Seoul, Republic of Korea as an independent, interactive entertainment studio that focused on the development and publishing of casual games and mobile applications. In the year 2017, the company was acquired by a leading social casino business, DoubleU Games Co., Ltd. (DUG) and later DUG acquired DDI-US, which has now become their primary operating subsidiary.

Key Performance Indicators

Key Management Highlights

Industry Overview

As per SEC F-1 filing, the global social casino market was valued at US$ 7.0 billion in 2020. This is expected to grow with a CAGR of 4.2% over the next four years and reach US$8.6 billion by 2025.

The gaming Industry in South Korea is accessed by more than 70% of the population on the back its enormous gaming infrastructure. During FY 2020, the gaming industry in South Korea contributed to around 13% of the overall content Industry and is estimated to be worth around USD 7.0 billion.

The South Korea gaming market is considered the fourth largest market after the United States, China, and Japan. Also, the industry has been generating good export revenues. During FY 2019, the industry had generated export worth USD 6.9 billion.

The size of the gaming industry in South Korea is expected to rise steadily from 17.09 trillion won in 2020 to 18.27 trillion won and 19.91 trillion won in FY 2021 and FY 2022 respectively.

Use of IPO Proceeds

In the prospectus the company has mentioned that the ADSs proceeds will be utilized towards the working capital and general corporate purposes, including payments for resolution of pending legal proceedings.

Financial Overview: H1FY21

Source: Company Filing

• For the six months ended June 30, 2021, the group’s revenue surged by 8% to US$ 189.9 million as compared to US$ 175.1 million reported in the same period of the corresponding previous financial year.
• Cost of Sales as % of Sales Revenue lowered by 30bps to 34.9% from 35.2% as reported from a year prior.
• Sales and Marketing expenses as % of revenue increased to 20.9% as compared to 18.7% in the prior period.
• During the period under review, the company’s reported adjusted EBITDA stood at US$ 64.2 million as compared to US$ 61.6 million reported a year before, and adjusted EBITDA margin stood at 33.8% vs 35.2% in the corresponding period of the previous fiscal year.
• EBITDA has slightly narrowed on the back of the higher sales and marketing expenses as a % of revenue.
• Net Income during the period under consideration jumped to US$ 37.8 million compared to US$ 29.9 million in the same period of the corresponding previous financial year. The Net Income margin bolstered to 19.9% against 17% as reported in the previous corresponding financial year.
• The company has debt free balance sheet with US$ 106.3 million in Cash and Cash Equivalents.
• Total Assets of the company at the end of June 30, 2021, stood at US$ 848.2 million vs. Total Liabilities of US$ 109.7 million.

Risks Associated: (Moderate to High)

The company’s business is exposed to a large variety of risks ranging from:

• Ability of the company to protect proprietary information and their owned and licensed intellectual property.
• Intense competition and company’s ability to effectively compete.
• The company is substantially dependent on third-party platforms to make their games available to the players and to collect their revenues. Any discontinuation in the service provided by the platform operators could have material impact on the firms’ financials.
• Investing in ADSs involved higher degree of risks.
• Company is eligible for reduced public company reporting requirement as it is organized under the law in the Republic of Korea.

Relative Valuation: Price/Sales (x)

Conclusion
The company is capitalizing on its strong technology platform. It has been consistently launching high-quality slot content and innovative games on a global level via centralized cloud-based technology platform. Further, the company has strong financial health with debt free balance sheet, generating consistent free cash flow and maintaining consistency in margin profile, over the past 8 quarters.

However, despite robust financial metrices and scalable business model with strong penetration, the company’s offering is coming at a discounted valuation compared to its peers, which makes it ‘Attractive’ from the valuation standpoint. However, in the short run, given the stretched equity valuations across the board and hovering uncertainties over the rising delta variant cases, the stock price movement could remain volatile and the risk associated with this IPO ranges from Moderate to High Risk.

*The IPO price settled at $17.75 on the first issue date as on 31^st August 2021.

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