Sklz Stock – Skillz (NYSE: SKLZ) is a mobile gaming technology platform. The company focuses on creating opportunities to make money through competition. Unlike other gaming platforms that earn revenue through in-app purchases [IAP] or in-app advertising [IAA]. The company claims that the business models of these platforms are “broken”. In addition, the company believes that the future of gaming is going to e-sports. Therefore, Skillz Inc. is on a mission to “democratize gaming by leveling the playing field for [developers] to reach out to create sports.”
However, in our previous article we explained that IAPs and IAAs are unlikely to become irrelevant anytime soon. Major game publishers continue to rely on these proven monetization models. We have also proven that most players favor these models. Nor is eSports exclusive to SKLZ. Major game developers such as Garena (SE) have also exploited eSports. E-sports allows game developers to create a highly interactive community of players.
We are still shareholders of SKLZ shares. However, the stock is down more than 20% from our original purchase price. In addition, we have previously emphasized that this is a speculative value for our portfolio. So the exposure is much less than our main task. However, we do not want to keep it going for the long term.
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We present our thesis on whether the current weakness in stocks represents an opportunity for investors to increase their exposure.
Gaming stocks have had a bad year so far. The SKLZ stock YTD performance is the worst here. The shares returned -61.8% YTD. It got off to a brilliant start that in February it was up almost 100% year over year. Unfortunately, this momentum turned bearish and wiped out all his gains in a month. With the exception of SE, gaming stocks significantly underperformed the SPDR S&P 500 ETF (SPY) in 2021.
Skillz operates on an “asset-light” business model and low direct costs. No need to hire and maintain expensive developer teams. Instead, it’s a platform for developers to build their games to monetize on Skillz’s competitive platform. As a result, Skillz receives a commission on your gross net market volume (GMV). Commission is defined as your receipt rate.
Skillz has maintained a steady acceptance rate over time. The company recorded a profit figure of 14.7% in Q2 2021. However, Skillz also stressed that it could increase its take rate in the future to increase its earning potential. These opportunities can arise if it can attract more paying users to its platform.
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The company’s gross profit is then derived from its performance ratio. So under its “asset light” platform, it’s no surprise that it reported solid gross margins. The company has consistently reported a gross margin of around 95%.
However, the “point of interest” is the profit margin of sales and management. High sales and management margins are the main reason for negative pre-tax and net profit margins. Skillz CEO Andrew Paradise recently discussed the company’s aggressive spending intent on general and administrative expenses. He emphasized:
Part of that is again our gross margin of 95% as a company. So we could be profitable today if we want to slow down our penetration into the big market ahead. But if you think about our business, like if you think about the second quarter of this year, our adjusted EBITDA margin before user acquisition was actually 17%. We believe that in order to reach the opportunities of our players, we have currently invested $2.8 billion in growth with the principle of understanding these returns, while carefully monitoring the performance of the team. (from Citi Global Technology Webinar 2021)
Therefore, Paradise believes that SKLZ still has a great opportunity to capture the growth of mobile gaming. Along with the appeal of eSports, the company is certainly operating in a rapidly growing market.
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The key question investors are asking is whether their war is justified. Sales and management margins above 140% are very expensive to maintain. Importantly, SKLZ has a relatively healthy cash fund of $693 million and no debt. As a result, the company is in good financial standing to execute its aggressive user acquisition (UA) strategy.
Additionally, the acquisition of Aarki is also expected to help Skillz optimize its UA costs. The company notes that it will move about $200 million in spending from AU to Aarki this year. That’s a significant amount because the company spent about $250 million in general and administrative expenses in the first half of 2021. The migrated expenses allow Aarki to optimize between $40 million and $60 million. UA costs. However, Skillz also announced that cost optimization will take time. Optimization can take up to 24 months to complete. As a result, the operational effects of the migration to Aarki will take some time to show.
The company reported a monthly active user (MAU) of 2.4 million for Q2 2021. It follows a recent downtrend. In Q1’21, MAU is 2.7M. As a result, there was a sharp decline of 11.1% quarter-on-quarter ((TQ)). In addition, the annual figures are largely unchanged. The company reported a MAU of 2.6 million in Q1’20. It also reported a MAU of 2.5 million in Q2 2020. So readers can easily see that Skillz is trying to attract more MAUs to its platform. As a result, the company may have to continue spending aggressively to maintain its MAU.
Of course, the focus of the company has always been the paid MAU. The MAU payout accounted for 19.3% of the total mAU base in Q2’21. That’s an improvement over FQ1’21’s 17.3%. It shows that the company was able to improve its user monetization rate. This is also a significant improvement from the 12% rate in Q2’20. From that perspective, it shows that the company’s aggressive UA efforts seem to be making progress. However, we believe Skillz still needs to address its downtrending MAU. The company can certainly address short-term vulnerabilities with improved monetization metrics. So far we haven’t seen anything wrong. However, monetizing a declining MAU base can become increasingly difficult.
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Skillz has raised the stakes by investing in Exit Games to accelerate its synchronized gaming ambitions. The most prominent genre is the battle royale game. These games include Fortnite, Garena Free Fire (SE) and PUBG Mobile (OTCPK:TCEHY). These are the mobile games that dominate the battle royale genre the most. SensorTower’s Q3’21 revenue data shows PUBG Mobile and Garena Free Fire as the #1 and #8 games worldwide. However, it is important to note that game development takes a long time.
Just one more point, right? As for the game, I think you have created [the point] [of] the IP, and it is true that it will be years before you see the final product. I mean, if you look at our recent game catalog, where we’ve announced more than 40 games, I think it’s a combination, right? Some are original IPs that take a long time to develop. Some existing IP that we use existing content, a pretty well tested game and our mobile innovation addition, then we develop it for the launch. (from Tencent’s FQ1’21 earnings call)
It explains why game developers “treat” their main titles for a considerable time. So we’re not sure how competitive SKLZ’s new titles will be? Major battle royale developers make huge profits from their top titles. They also have no problem attracting new users. These are huge cash cows for them.
Garena’s QAU growth is in stark contrast to SKLZ’s statistics. Garena increased its QAU by 11.8% QoQ. Its QAU also increased 45.1% year-on-year. Garena is a very profitable business for Sea Limited. The company reported an adjusted EBITDA margin of 72.3% for Q2 2021. They didn’t need that kind of spending on Free Fire. However, users continue to use the Free Fire platform.
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We applaud Skillz for their ambitious push into new game genres. However, we are not sure if the company can compete in these highly lucrative segments. These are usually segments dominated by top game publishers or developers. Nothing like Tether or Big Run drove SKLZ’s revenue.
Skillz is estimated to grow revenue at a CAGR of 25.1% in FY25. However, GAAP EBITDA is expected to be profitable only in 2024. ” Measures. It seems normal, really.
As already mentioned, SKLZ stock is in the speculative category of our portfolio. However, we’re willing to give the company the benefit of the doubt to prove us wrong here. After all, it has proven that it can make good money from its users. The monetization strategy clearly works.
Still, it’s not a cheap stock despite a -61.8% year-to-date return. It still ranks higher than the slower-growing Electronic Arts (EA). But, EA is much more profitable. In addition, revenues are expected to grow by 10.4% in 2025. So it is not slow because of its size. For some investors, SKLZ stock may still be too expensive for what it’s worth. Definitely not a stock for conservative investors or even value investors.
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However, we currently maintain a Buy rating on SKLZ stock. But we want to
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