Are DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) Investors Paying Above The Intrinsic Value?
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, DoubleDown Interactive fair value estimate is US$9.63
- DoubleDown Interactive is estimated to be 30% overvalued based on current share price of US$12.50
- Analyst price target for DDI is US$15.58, which is 62% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for DoubleDown Interactive
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Levered FCF ($, Millions) | US$33.5m | US$31.9m | US$31.1m | US$30.8m | US$30.8m | US$31.0m | US$31.3m | US$31.8m | US$32.4m | US$33.0m |
| Growth Rate Estimate Source | Est @ -7.73% | Est @ -4.69% | Est @ -2.57% | Est @ -1.09% | Est @ -0.05% | Est @ 0.68% | Est @ 1.19% | Est @ 1.55% | Est @ 1.80% | Est @ 1.97% |
| Present Value ($, Millions) Discounted @ 8.2% | US$31.0 | US$27.3 | US$24.6 | US$22.5 | US$20.8 | US$19.3 | US$18.1 | US$17.0 | US$16.0 | US$15.0 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$211m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.2%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$33m× (1 + 2.4%) ÷ (8.2%– 2.4%) = US$583m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$583m÷ ( 1 + 8.2%)10= US$266m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$477m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$12.5, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at DoubleDown Interactive as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.2%, which is based on a levered beta of 1.090. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for DoubleDown Interactive
- Debt is not viewed as a risk.
- No major weaknesses identified for DDI.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to grow slower than the American market.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a premium to intrinsic value? For DoubleDown Interactive, there are three additional items you should further research:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with DoubleDown Interactive , and understanding it should be part of your investment process.
- Future Earnings: How does DDI's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.