DoubleDown is going public: Why isn’t its IPO worth more?

Agora isn’t the only company headquartered outside the United States aiming to go public domestically this quarter. After catching up on Agora’s F-1 filing, the China-and-U.S.-based, API-powered tech company that went public last week, today we’re parsing DoubleDown Interactive’s IPO document.

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The mobile gaming company is targeting the NASDAQ and wants to trade under the ticker symbol “DDI.”

As with Agora, DoubleDown filed an F-1, instead of an S-1. That’s because it’s based in South Korea, but it’s slightly more complicated than that. DoubleDown was founded in Seattle, according to Crunchbase, before selling itself to DoubleU Games, which is based in South Korea. So, yes, the company is filing an F-1 and will remain majority-held by its South Korean parent company post-IPO, but this offering is more a local affair than it might at first seem.

Even more, with a $17 to $19 per-share IPO price range, the company could be worth up to nearly $1 billion when it debuts. Does that pricing make sense? We want to find out.

So let’s quickly explore the company this morning. We’ll see what this mobile, social gaming company looks like under the hood in an effort to understand why it is being sent to the public markets right now. Let’s go!


Any gaming company has to have its fun-damentals in place so that it can have solid financial results, right? Right?

Anyway, DoubleDown is a nicely profitable company. In 2019 its revenue only grew a hair to $273.6 million from $266.9 million the year before (a mere 2.5% gain), but the company’s net income rose from $25.1 million to $36.3 million, and its adjusted EBITDA rose from $85.1 million to $101.7 million over the same period.

Looking recently it’s more of the same. In Q1 2020 the company posted revenue of $76.1 million, representing 11.4% growth compared to its year-ago Q1 result of $68.3 million. That means the company’s growth accelerated in Q1 from its 2019 pace of expansion.

And, DoubleDown’s net and adjusted profits also rose in the first three months of 2020, expanding to $12.9 million and $25.3 million from $8.8 million and $24.7 million, respectively, when compared to year-ago results.

Adding to the good news, the company has limited debt, strong operating cash flow and its bonds were recently converted into shares; DoubleDown is not going public to save itself from a cash crunch.

So what to make of this company, I wonder. Normally when we dig through an IPO document, we are examining a company that is growing very quickly and loses lots of money. DoubleDown is the opposite of that, which makes how it is priced all the more interesting.

In a turnaround, the company’s common stock is worth more than the shares that it will sell to public investors. Normally we see common shares worth a fraction of an ADS, or American depositary share. In this case, the company’s common stock is worth 20 ADSs per; this doesn’t matter much, except for the fact that it makes the company’s post-IPO common stock float appear tiny. A detail.

Anyway, the company is selling 5.5 million ADSs in its debut at a price between $17 and $19 per share, with 5.5 million more shares sold by existing shareholders, who are also supplying the greenshoe option of 1.65 million shares. That’s all complicated, but what matters is that the company could raise between $93.5 million and $104.5 million in its debut. That’s greater than the value of the company’s gross debt and far more than the value of its net debt.

Doing the fun ADS-to-common conversions, the company will be worth $846.4 million to $946.0 million. Recalling that DoubleU bought DoubleDown for $825 million, these numbers feel a bit light. Is there time for the IPO range to stretch? Does the company price higher than $19 per ADS?

The company’s Q1 annualized run rate is $304.4 million, making the upper end of its pricing scheme worth a little more than 3x revenue. That’s incredibly modest, especially given its double-digit percentage growth and material profits. And we can’t even point a finger at COVID-19 driving a bad Q2 for the company, as mentions of the pandemic are scarce in its IPO filing.

Recall that SaaS companies — software companies that sell their goods on a subscription basis — can be worth 20x, 30x, even 40x revenue. That’s because their revenues are high-margin (70% on a gross basis), and recurring.

DoubleDown’s gross margins in Q1 2020 were just about 65%. That’s great! Not SaaS great, sure, but still super good. And the company’s customers are sticky-as-gum. Check this out:

We believe that cohort behavior provides insight into the overall revenue retention dynamics of our business, reflecting our ability to convert players into paying players and drive monetization of our games over time. In 2019, 89% of our revenue was generated by installations prior to 2019 and our 2010 to 2018 cohorts experienced a 92% revenue retention in 2019, demonstrating our ability to consistently retain and monetize players.

That’s so steady it’s nearly SaaS! Even better, the company’s customer acquisition payback period has fallen from 477 days in 2016 (bad) to 199 days in 2017 (good) to 123 days in 2018 (great, given retention). The company didn’t supply formal 2019 retention numbers (bad), but did note that “management estimates the payback period in 2019 to be less than 180 days,” which is medium-fine.

So, pretty high-margin revenue, good retention, greatly improved CAC payback periods, plenty of cash, limited debt, and both net and adjusted profits on the rise? Instead of wondering why the flying f**k the market would value this company so highly, as we often have this year with companies like Vroom, we’re stuck in reverse: Why is this company worth so little?

That riddle should make its pricing dance very exciting. The company is expected to price tomorrow and trade Wednesday. Get hype.