Mobile game studios can use the platform owned by Skillz (NYSE: SKLZ) to turn their games into an e-sport, thereby employing a more profitable monetization route than just advertising. No longer do they need to worry about users ignoring ineffective ads when they are now actively participating in and paying for competitive gaming on their devices.
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In fact, the average per-user revenue for games using Skillz is over $6 versus under $2 for ad-based games. Of course, Skillz takes a cut of each transaction and this has resulted in terrific revenue growth for the company. However, it is at least a year away from positive unadjusted earnings so is Skillz a good investment today?
The bull case for Skillz
According to the company’s Q1 2021 report, Skillz’s revenue is up 92%, gross profit grew 95%, and gross margin increased by 100 basis points, year-over-year (YoY). Additionally, it has zero debt and over $600 million in cash. The company is confidently increasing its guidance for the year to $375 million, which would be a growth of 63% YoY. Drilling down, Skillz saw increases in average revenue per user (ARPU), paying monthly active users (pMAUs), and overall gross marketplace volume (GMV) to the tune of 86%, 81%, and 85%, respectively.
Skillz took a real risk on its platform as e-sports has traditionally been relegated to consoles and PCs, but found the risk paid off as evidenced by its growth. With 2.7 million monthly active users (MAUs), Skillz has tapped only 1% of the 2.7 billion mobile users worldwide, which means it still has plenty of room to grow. On that front, the company plans on expanding into India this year and is boosting its tech to move into racing, shooting, and battle-royale style games; furthermore, Skillz expanded its Android footprint and grew revenues from Android users two times faster than iOS. All of these factors will significantly boost the company’s addressable market.
The bear case for Skillz
Revenue might be up for Skillz, but so is net loss, which rose 245%; additionally, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), are down 113%, YoY. Although the company stresses that its most important metric is its pMAUs, the underlying base of that metric, the MAU, is growing very slowly and is up only 3.8%, YoY. The company also missed the consensus forecast of its EPS by $0.05, coming in at -$0.15.
Skillz relies on three games for nearly 65% of its total revenue and those games, Solitaire Cube, 21 Blitz, and Backout Bingo are very similar to existing competing games on the market. The company also takes a fifty percent cut from developers for all sales on their platform which is considerably higher than say Apple’s 30%. Skillz spends a lot of money on advertising, which is a good thing but it may potentially alienate future clients by employing misleading statistics and prize information. A breakdown in any one of these areas would most assuredly affect the company’s stock price.
So, is Skillz a good watch?
I feel that in the long term, Skillz can be a good watch. Mobile games are all going to pivot from ad-based revenue to e-sports and Skillz has the anti-cheat platform just for that purpose; additionally, Apple’s recent tracking restriction puts a damper on any apps with targeted ads and will provide further tailwinds for the company. Skillz will continue to expand into more markets and offer more games and is expected to enter positive EBITDA territory sometime in 2022.
1. Who is the CEO of Skillz?
Co-founder Andrew Paradise
2. When did Skillz go public?
December 17, 2020, via a SPAC merger with Flying Eagle Acquisition Corp.
3. What three nations have the highest number of smartphone users?
China with 911 million; India with 440 million; and the U.S. with 270 million
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