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

Published June 29, 2020

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!

Fundamentals

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.

Agora starts life as a public company by more than doubling to $50 a share

Published June 26, 2020

Shares of Agora, a China and U.S.-based “real-time engagement” API company, soared today after it went public.

Yesterday Agora priced 17.5 million shares at $20 apiece, up from its target range of $16 to $18 per share. The firm raised $350 in its debut, or around 10 times its Q1 2020 revenue and is now amply capitalized and has runway for effectively forever, given its modest cash consumption as an ongoing concern.

But while the debut was a success, seeing Agora’s share price rise as quickly as it did was not universally popular. Regular critic of the traditional IPO process Bill Gurley — a venture capitalist, so someone with a stake in this particular gambit — weighed in:

Pretty amazing that there is a financial exercise on this planet involving hundreds of millions of dollars where its OK to not even get to 50% of the actual end result. The process is so rigged/broken at this point. They missed by more than the original guess. #marketpricing pic.twitter.com/MqmmYRw3ZM

— Bill Gurley (@bgurley) June 26, 2020

Let me translate. Gurley is irked — rightly, to at least some degree — that as Agora opened at $45 per share, the company’s IPO was awfully priced. By that we mean that the company should have sold its IPO shares not at $20, but at $45, the value at which the market quickly repriced them.

As $45 is more than twice $20, its bankers “missed by more than [their] original guess.” Given the number of shares the company sold, the mis-pricing could be worth up to $437.5 million!

There’s merit to this argument, but it’s not as complete a slam dunk as it might appear. Chat with CEOs of public companies and they will tell you about how important it is to have steady, stable, long-term shareholders of their equity. Those you might, say, meet on a roadshow and get to invest in your IPO shares.

Those groups — the long-term investors that tech folks claim to love so dearly — are likely a bit more price conscious than the momentum traders eager to find upside in recent debuts. That is, folks more likely to hold onto shares for a shorter period of time.

So, if you want long-term shareholders, you may have to price you IPO under the price the market may initially bear once trading begins.

Agora’s above-range IPO pricing underscores a welcoming IPO market

Still, holy shit $20 per share is not close to $45. Gurley has a point.

The future

Change may be coming. The Agora news rotates back to what the NYSE, an American exchange, is doing. Namely trying to come up with a way to let companies direct list (to just start trading, sans pricing or raising new capital), and raise capital. This gets rid of the issues that Gurley highlighted above. At least in theory.

Obviously, if that model becomes possible and long-term investors are willing to pay for shares in a slightly different manner, the new method will be far superior than the old for companies that are great. What sort of companies get burned from first-day pops the most? I reckon it’s the most attractive, or hyped companies.

The companies that would make the most attractive IPOs would use the new method, leaving — what? The detritus to go out the old-fashioned way? Signaling issues abound!

Anyway, it was a zany first day for Agora.

Agora’s above-range pricing underscores a welcoming IPO market

Published June 26, 2020

In a move that highlights how open the American IPO window may be at the moment, China-based Agora priced its public offering at $20 per share last night, ahead of its $16 to $18 proposed price range. (Update: As noted here, the company has a second HQ in California.)

At $20 per share, the 17.5 million shares sold in its debut raised $350 million, a huge haul for a company that reported around 10% of that figure in Q1 2020 revenue. Provided that your humble servant is doing his Class A to ADS share conversion calculations correctly, Agora is worth about $2 billion at its IPO price.

Agora raised well over $100 million while a private company, backed by GGV Capital, Coatue and others, according to Crunchbase data.

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Agora is an API-powered company that allows customers to embed real-time video and voice abilities in their applications; appropriately, the company’s ticker symbol in America will be “API.”

With an annual run rate of $142.2 million, a $2 billion valuation gives Agora a run-rate multiple of around 14x. That’s rich, but not stratospheric. Perhaps Agora wasn’t able to command a higher multiple due to its sub-70% margins (68.8% in Q1)?

Agora’s financials make its IPO pricing a neat puzzle, so let’s pull apart the good and the bad to better understand why the market was willing to pay more than the company anticipated.

After that short exercise, we’ll make note of the current IPO climate, inclusive of what we learn from Agora. (Spoiler for unicorns out there: Things look good.)

The good, the bad, the odd

We can’t calculate Agora’s enterprise value with confidence until we get updated filings. But taking into account the company’s pre-IPO cash and liabilities, its implied enterprise value/run rate is something around 13x. (That figure will dip if the company’s shares don’t rise after its debut, as its cash position rises from its share sale; more on enterprise values here.)