SKLZ - Skillz Is Disrupting the Massive Mobile Gaming Industry
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Skillz (NYSE: SKLZ) was one of the high-flying SPAC stocks of 2020. Ever since the completion of its merger, SKLZ stock has been on a tear.
With the implicit endorsement of Cathie Wood, the company’s stock rose close to 4x only dropping recently. In my opinion, this pause represents an opportunity for investors to load up on SKLZ stock.
The long-term bull thesis on SKLZ stock remains intact. Don’t let the volatility scare you, the future of this company remains as bright as ever.
SKLZ Stock and Gaming
Just what exactly does Skillz do? Skillz is a software company that enables game developers to easily add social gaming and esports features into their games. The company is particularly focused on mobile games, which is a quickly growing segment of the market. Mobile gaming is an $85 billion industry and represents a massive opportunity for Skillz.
This company has the potential to revolutionize the way mobile videogame apps are monetized. As you may know, most mobile games are free to play. But nothing in the world is truly free, as these games are monetized using either in-game ads or through in-app purchases. These two methods of monetization have severe downsides when it comes to the gamer’s overall experience.
In-game ads can be extremely frustrating if done too often and remove the player from the immersion of the game. In-app purchases, on the other hand, create issues with a game’s reward system, lock-out certain players with limited spending power and create pay-to-win dynamics. In other words, certain players advance or get cosmetic upgrades not because of skill but rather due to their willingness to open their wallets.
Another trend that can be seen in popular mobile games is giving players a limited number of “lives” or making them wait to access certain levels. Unless, of course, they are willing to pay for the privilege to speed things up. Skillz completely turns this monetization model on its head.
The Skillz platform enables the setting up of games to be played for prizes or real money. This can be done in a one-on-one format or something similar to an esports tournament. So imagine a massive Angry Birds type tournament where all participants pay an entry fee and receive real money prizes. Skillz’s technology platform makes this possible in almost any game, not just those developed by large triple-A game studios. For its trouble, Skillz gets a 14% fee of the gross merchandise value, or GMV.
Skillz Is a Win-Win for All Participants
The Skillz platform is advantageous for developers as well. Adding these features makes games more competitive and enjoyable and thus increases engagement. This will all lead to more revenue for the game developers, so it’s basically a win-win.
According to the company, Skillz has superior monetization of users when compared to its peers. The company has an average revenue per monthly active user (ARPU) of $6.30, compared to Zynga’s (NASDAQ: ZNGA) $1.51 ARPU and Glu Mobile’s (NASDAQ: GLUU) $1.89.
The proof of the value the company provides can be seen in its latest quarterly results. Revenue in Q4 2020 grew by an impressive 95%, marking 20 quarters of consecutive growth. GMV grew by 80% in 2020, leading to full-year revenue of $230 million in 2020 – a growth rate of 92%.
Expansion as Games Are Added
Currently only a handful of games generate revenue for the company. At the end of 2020, three games accounted for 79% of the company’s revenue. Now some investors will see this as a huge risk but I prefer to take a glass-half-full approach.
If the company can make this much revenue from three games, what will happen once it expands and gets more game developers into its platform?
The NFL is attaching its brand to a Skillz game in the near future. This would be absolutely massive for the company. The company had gross margins of 95%, meaning as the company scales its growth, SKLZ stock will only continue to move higher.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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