The gaming industry had a stellar year in 2020 with stay-at-home orders in place, creating a tailwind with increased spending and user engagement on gaming platforms. These trends look set to continue in 2021 and beyond as the world re-emerges from COVID-19.
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We take a look at two companies that have made it into one of famed investor Cathie Wood’s ETFs and ask which stock is a better watch?
Skillz: Bull vs Bear Arguments
Skillz (NYSE: SKLZ) is a mobile gaming platform that enables developers to use the platform to integrate competitions into their games and has a mission to “connect the world through competition”. The company has previously been listed on CNBC’s disruptor 50 list and went public via a SPAC merger in December 2020.
It was founded in 2012 by founder and CEO Andrew Paradise and is headquartered in San Francisco. Paradise is a serial entrepreneur and has a successful track record with three successful exits. Skillz appears to have a positive company culture with a 4.1 out of 5-star rating on Glassdoor, while Paradise has an 80% approval rating.
It hosts billions of e-sports tournaments and does not have to develop games, so it is in a unique position being neutral. In Q1 2021, revenue increased by 92% year-over-year (YoY) to $83.7 million. Its gross margins were a staggering 95%, and it has no debt with $613 million of cash. The company also raised guidance for the full fiscal year, which equates to 63% growth.
Skillz claims to generate 70% more engagement than the number one mobile game. It had 467 million paying monthly active users and average revenue per user of $10.35, increasing 81% and 86%, respectively. With Skillz estimating the mobile gaming market to be in the region of $86 billion, there is an immense market opportunity. In addition, expansion internationally into countries such as India will increase its total-addressable-market (TAM) significantly.
However, Skillz is unprofitable and reported a widening net loss of $53.6 million in Q1 compared to $15.5 million a year prior, which is concerning. Its sales and marketing, and user acquisition costs also increased in 2020, causing a decline in expected average lifetime value. These costs are likely to remain high as it attempts to attract new users.
Skillz also has a high customer concentration rate, with three customers accounting for 76% of revenue. If it were to lose one of these customers, the stock would be adversely affected.
Roblox: Bull vs Bear Arguments
Roblox (NYSE: RBLX) is a gaming platform with 42.1 million daily active users (DAU’s) in Q1 2021, an increase of 79% YoY. The 3D games on the platform are user-generated, and the platform is used in over 180 countries and is also known as the metaverse.
Roblox was founded in 2004 and went public through a direct listing in March 2021. It was co-founded by David Baszucki, who is the current CEO. Baszucki has an impressive 98% approval rating on Glassdoor, while the company has 4.4 out of 5 stars.
Roblox reported impressive revenue growth of 140% in Q1 to roughly $387 million. It monetizes its users through its in-game currency called ‘Robux’, which can be used to buy accessories, upgrade avatars, and more and can also be converted back to a regular currency, with Roblox earning a cut of every transaction. It continues to successfully monetize its users with an average booking per daily active user of $15.48, up 48% YoY.
The majority of the users on the platform are under the age of 13 and the hours engaged on the platform continued to increase by 98% YoY to 9 billion hours. This growth was driven primarily by international growth outside of North America. Roblox continues to make long-term investments in the business and recently partnered with Sony to engage users with concerts.
Before going public last year, Roblox was valued at $4 billion in a private funding round compared to its market cap of nearly $50 billion today. It also trades at 43x sales and will have to continue to execute flawlessly to maintain this valuation. The company is also unprofitable, reporting a net loss of $134.2 million in the quarter.
So, which stock is a better watch right now?
I would be cautious about either stock right now. Both companies are unprofitable, and Skillz’ s expenses are rising, and customer concentration is extremely high. However, if Roblox’s valuation were lower, it would be a better buy.