Israel Englander, CEO of the Millennium Management fund, is well-known in the investment world. Lately, Mr. Englander’s fund has been enthusiastically buying shares of video game company Skillz (NYSE:SKLZ), increasing its stake by 376 percent in the first quarter alone.
The tiny company appears to have attracted Millennium’s attention in a big way, making it a potentially attractive option for other investors. Why is Skillz so attractive?
Skillz operates a platform for mobile game development. The unique aspect of the Skillz platform is the encouragement of social competition, encouraging higher rates of engagement.
Skillz is also involved in the burgeoning eSports industry as a tournament operator. In Skillz games and tournaments, players compete with each other for cash prizes, a practice rarely seen elsewhere in the video gaming industry.
Why Is Israel Englander Buying So Aggressively?
While Englander has not been terribly public about his fund’s interest in Skillz, there are several likely reasons the noted investor is buying so much of the company’s stock.
To begin with, Skillz has the ability to capitalize on mobile gaming without depending on its own titles. The Skillz platform allows independent, third-party developers to create their own games. This takes much of the difficult work of game development off of Skillz and lets it operate as a leaner business than many of its competitors.
The cash incentives associated with Skillz are also a likely driver of Englander’s interest.
Professional video gaming, also known as eSports, is expected to generate $1 billion in revenue for the first time in 2022. The trend of professional gaming has grown rapidly in recent years, bringing avid gamers on as competitors and others on as viewers.
Skillz is clearly well-positioned to take advantage of the eSports trend and so can be expected to grow alongside it.
A final factor in favor of Skillz is its recent partnership with the NFL. This agreement allows Skillz to develop games themed around the football league. These games could attract massive revenues and larger numbers of players to the Skillz platform.
While the agreement was only finalized earlier this year, its impact over the next 2-3 years could be crucial for the young company.
Skillz Earnings, Revenue and Growth
In Q1, Skillz expanded its revenue to $93 million, a 12 percent year-over-year increase.
While gross profit grew by 6 percent, net losses also expanded from $54 million to $148 million. This increase in losses is concerning but not altogether atypical of a company in such early stages of its development.
For the full year of 2022, Skillz expects to generate about $400 million in revenue.
Beyond its financials, Skillz saw strong signs of user growth in Q1. The number of paying monthly users increased by 22 percent.
At the same time, Skillz significantly improved its marketing efficiency and introduced a new cloud gaming system that management claims will increase the average lifetime value per user. Faster user growth and greater value per customer will likely support higher earnings and revenues in the coming years.
Valuation and Target Pricing
As one might expect, Englander’s big stake comes with a distinct possibility of big rewards.
Analyst forecasts give Skillz a 12-month median price forecast of $3.00, 128.1 percent above its current price of $1.32. The range of price targets runs from $2.10 to $5.00, giving the stock anywhere from 60 to 280 percent upside.
In terms of value, Skillz is very much a mixed bag.
With a price-to-sales ratio of 1.49 and price-to-book of 1.09, the stock sells at reasonable multiples. Because its losses are widening and it is likely a good way out from profitability, however, its value isn’t as good as it looks at first glance.
Given its very low price, the stock is probably trading at a roughly fair range. If earnings explode in the coming years, though, it could be a bargain at its current level.
Is Skillz a Buy Now?
While Englander’s stake in the company is obviously well-considered, it’s important to note that this stock is quite risky.
At last reporting, Millennium owned 3,953,187 shares of Skillz. At today’s price, that puts the fund’s equity at about $5.23 million. Given that Millennium has more than $54 billion of assets under management, the stake in Skillz is a tiny fraction of the fund’s overall investment portfolio. As such, Englander’s risk from taking on so much Skillz is minimal in comparison to the assets he has to work with.
The risks associated with Skillz stem from its increasing losses and the fledgling industry it is in as a whole. If the company fails to achieve profitability, its value will obviously not increase over time.
Likewise, if eSports proves to be less popular than widely believed, businesses like Skillz that are dependent on it will likely fail to achieve their perceived potential.
Along with that risk, however, comes a very high potential for reward. Like the eSports industry itself, Skillz is still in its infancy. If the company emerges as a market leader as competitive gaming begins to attract more viewership, its growth over the coming years could be massive.
While it may not be an incredible value by standard metrics, Skillz trades at an acceptable multiple of both sales and book value. As such, it at least isn’t overpriced. With a narrowing of losses and eventual earnings, the stock could move far above its current level and produce considerable gains for investors.
Taking all of this into consideration, Skillz could be a buy for highly risk-tolerant investors who are bullish on video gaming and eSports. Due to the risks, though, it’s likely a good idea to follow Englander’s example and take out a small position relative to your overall portfolio if you choose to invest in Skillz. For more conservative investors, Skillz is likely not a good fit due to its risk level.
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.