Skillz Inc (NYSE:SKLZ) is a mobile esports platform integrated into a variety of Android and iOS games. It allows players to participate in and bet on cross-platform competitions. As it continues to expand, famed money manager Cathie Wood is buying up large amounts of the company’s stock.
With the stamp of approval from ARK Invest, is Skillz stock a buy?
The company reported 23 consecutive quarters of revenue that outperformed expectations, including 70 percent year-over-year revenue growth in its most recent quarter. Success is attracting top brass personnel. Skillz recently hired former Amazon executive Vatsal Bhardwaj as Chief Product Officer.
Esports is a growing market expected to reach $6.82 billion by 2027 at a compound annual growth rate (CAGR) of 24.4 percent. It both creates games and has its own mobile advertising platform, which together result in a profitable vertical integration.
So what is it about the Skillz business model that has been so successful?
How Skillz Makes Money
Skillz spent $252 million in 2020 to generate $230 million in revenue. It spends heavily on paying users to incentivize them to play games through its platform. Any time a player pays an entry fee for a game, the company takes a cut, and it has in-game ads and brand sponsorships contributing to the tally.
But revenues haven’t been as high as it costs, and the numbers could be more dire than we think.
The questionable financials attracted a heavy short interest in the stock. Over a quarter of the firm’s shares were shorted through the spring and summer before ARK turned the tides with its October investments. Much of this was caused by a scathing report from short seller Eagle Eye Research.
Essentially, the company gives free money to players to draw them into the platform. This creates confusion as to how much real revenue is generated when some of it is the free cash the company gave out.
Mobile Esports Market: 2.2 Billion Mobile Gamers
Although esports is expected to grow to nearly $7 billion, the mobile esports market will only account for $1.15 billion by 2025. Still, mobile games account for about 43 percent of smartphone usage, with an estimated 2.2 billion mobile gamers worldwide.
And a large concentration of that money rests in the hands of a few games, like PUBG Mobile and Fortnite, neither of which uses the Skillz platform. This demands the company casts a wide net across 1,600 game studios to reach its user base of 7 million players.
Unlike gambling (loot boxes drew regulatory ire for introducing gambling mechanics into gaming), esports is a skills-based platform. Players are competing against each other for high scores, a much different mechanic than betting on random chance.
This is why ARK believes Skillz will be a big player in the future of gaming.
Why Cathie Wood Bought Skillz
Wood and ARK Invest rose to prominence most notably for an outlandish call on Tesla, which then came true. The pace of growth enjoyed by ARK ETFs slowed down this year, but it hasn’t deterred Wood from adhering to what has, so far, proven to be a winning investment strategy.
Her investment team has bought Skillz for the ARK Innovation ETF (ARKK) on numerous occasions from October through November. The run occurred after the fund sold one million shares at the start of the month. The ETF is now holding over 15 million shares worth an estimated $181 million.
Wood believes the platform empowers small developers to create and monetize multiplayer games. Because of that, she sees a long-term need for the service in a crowded market where it’s difficult for the little guy to compete.
Here’s a further breakdown of its numbers.
Skillz Financials and Forecast
Because of its heavy spending on revenue generation, Skillz lost over $82 million in the first nine months of the year. Its adjusted EBITDA for the period of -$104 million is more than double the loss experienced in the same period of the prior year.
In the first nine months of the year, it spent over $458 million to generate over $275 million in revenue, which it expects to total $366 million by year end.
The company has over $543 million cash on hand with very little debt so burning hundreds of millions of dollars in cash is a justifiable cause for concern.
Nevertheless, the spending may be paying off. Skillz grew monthly active users from 2.7 million to 3.0 million over the past quarter. And the average revenue generated per user grew from $7.44 to $11.40, although only one out of every six users are paying. Management will need to grow its user base and increase revenue per player if it wants to reach back up to its high of $46.30.
Why Short Sellers Bet Against Skillz
Skillz is a highly shorted stock, although not shorted enough to attract Reddit’s r/WallStreetBets community. As such, it remains at risk of staying in the crosshairs of major hedge funds.
Another concern is that it’s not attached to the largest game companies. These large developers can afford to implement their own solution, and other platforms like AppLovin (NASDAQ:APP) offer a full-service solution that provides more monetization and development assistance.
Competitive headwinds could act as a drag on growth prospects for Skillz, leading to a mixed bag for bears and bulls.
Is Skillz Stock A Buy: The Bottom Line
Skillz is a heavily shorted stock, but it has the backing of ARK Invest among other well renowned money managers.
Short sellers contend that revenues are skewed by marketing practices. They also claim that Skillz has limited growth potential with large developers able to implement their own solutions.
If the company can find more effective ways to onboard more players across more popular games, it can be a big winner. Mobile gaming is a growing industry, and esports are a staple of that culture.
From a discounted cash flow forecast perspective, SKLZ share price has upside potential to $16 per share, representing significant upside still.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.