Video Game Platform Skillz Has Been a Bad Investment

Stock (Symbol)

Skillz (SKLZ)

Stock Price


Data is as of
March 31, 2021
Expected to Report
May 4
Company Description
Skillz Inc., formerly Flying Eagle Acquisition Corp., is a technology company that provides monetization services to game developers through mobile eSports platform. The Company’s principal activity is to develop and support an online-hosted technology platform that enables independent game developers to host tournaments and provide competitive gaming activity to end-users. The Company is engaged in operate a marketplace that connects the world through competition, serving both developers and users.  Source: Thomson Financial
Sharek’s Take
David Sharek Skillz (SKLZ) took a big tumble after the company reported its first earnings report as a publicly traded company. The results weren’t pretty. SKLZ lost $0.14 a share and missed estimates of a $0.08 loss. What may be bugging investors is Monthly Active Users have hovered around 2.5 million the past five qtrs, meanwhile the company is plowing money into new customer acquisition. Sales & Marketing expense was $252 million last qtr, while total revenue was $230 million. Paying Monthly Active Users have been rising. Also, the software may be easy to duplicate, as one of Skillz more popular bingo games, Blackout Bingo, now has competition in the space. There are also concerns that the available games aren’t good (but there will be new games on the way).

Skillz is a mobile game platform that allows users to compete against each other for cash prizes and other perks. The company derives its revenue from users who have to pay to play, then splits the revenue between the winning players and the video game developer. Skillz is in a young growing market, with mobile games becoming ore popular than PC and console games. The company thinks the gaming market is $149 billion in annual revenue, with $68 billion coming from mobile. Mobile game revenue has grown 25% per year since 2012 (source: NewZoo), but a problem with FREE mobile games is they often had ads taking up screenspace. in 2019 only 10% of monthly active users entered into paid contests, and the company plans to monitize the remaining 90% through non-intrusive, low friction advertisements. 90% of revenue is from North America, and the International markets are 4x larger than North America, so there is growth opportunity overseas. What I really like about SKLZ is the minutes per day users spend on the app (source: Skills Investor Presentation September 2020):

  • Skillz: 62 minutes
  • TikTok 52 minutes
  • Facebook: 41 minutes
  • YouTube: 40 minutes
  • Candy Crush: 37 minutes
  • Snap: 28 minutes
  • Mobile Gaming: 17 minutes

During Fiscal 2020, the company expects to have $1.6 billion in total entry fees paid through its platform via 2 billion tournaments per year. Within those entry fees, Skillz has a take-rate of 14%. For example, two gamers pay $0.60 each n entry fees to play, totaling $1.20. Of that, $1.04 goes to the game developer, prices and incentives, leaving $0.16 for Skills. The company then has a profit margin of 95%, giving Skillz a gross profit of $0.15, or $0.04 after operating expenses.

Skillz management says the mobile game market grew 20% a year from 2014-2019 and is expected to grow from $68 million in 2019 to $150 million in 2025. So the sector is great. But the stock’s WAY down off its highs and is showing no signs of life here. SKLZ was added to the Growth Portfolio last qtr. I will sell the stock today and take a heavy loss (around 50%). Earlier this week, I invested in Roblox and I feel that may be a stronger investment.

One Year Chart
Note: these charts and tables were don’t on March 31st. Today is April 15th. I’ve had this report on my to-do list for two weeks as I contemplated my next step. With SKLZ declining from $19 to $15 since these charts were made, I think this stock is very weak.

SKLZ came to market though a merger with a special purpose acquisition company (SPAC) Flying Eagle Acquisition on December 17, 2020 with the stock at $18. But notice in the one-year chart the stock broke out at $15. This was on November 30th. I added the stock to the Growth Portfolio on February 3 at ~$31. Today the stock is $15 and Im selling.

There is no Est. LTG. There is no P/E. SKLZ is losing money, and that is expected to continue until 2023. In fact, the company said losses will be bigger than anticipated when it reported results last qtr.

Earnings Table
Last qtr SKLZ had a loss of $0.14 and misses estimates of a $0.08 loss. Revenue increased 95%. Number of users was omitted from the first two pages of the earnings release. So the company is spending so much money to get new users, but there isn’t much user growth from these investments.

Annual Profit Estimates declined.

Qtrly profit Estimates also declined and there is expected to be losses in each of the next 4 qtrs.

Fair Value
Since this company doesn’t make a profit, I’ll value it on a price-to-sales basis. Last qtr with the stock at $29 I felt SKLZ should sell for 30x revenue. That clearly was wrong as the stock crashed from $29 to $19. So this qtr I put my Fair Value at 20x revenue. Note on page 6 of this 8k from April 8, management doesn’t include potential new games in its revenue guidance, meaning any new games are purely upside to our forecast:

20 x $370 million revenue = $7.3 billion market cap
$7.3 billion / 390 million shares = $19

2021 Est:
20 x $370 million revenue = $7.4 billion market cap
$7.4 billion / 390 million shares = $19
Upside/Downside: +1%

2021 Est:
20 x $570 million revenue = $11.4 billion market cap
$11.4 billion / 390 million shares = $29
Upside/Downside: +56%

Bottom Line
Skillz (SKLZ) has a great platform that’s only getting better. I think of this company as a FinTech stock more than a technology stock because the game developers are the ones doing mostly all the programming.

There is a lot of issues here. The company needs more active users, the games need to improve, and I think its just too early for this stock to be a success. If you plow more money into Sales & Marketing than the revenue you do in a quarter, you better be gaining customers. Skillz isn’t.

SKLZ will be sold from the Growth Portfolio. I’m not going to add it to the Aggressive Growth Portfolio because it doesn’t seem like this is one of the top 100 stocks in the world.


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