Home Gambling Skillz Stock: Blurring the Lines Between Game and Gambling (NYSE: SKLZ)

Skillz Stock: Blurring the Lines Between Game and Gambling (NYSE: SKLZ)

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Investment thesis

Skillz Inc. (NYSE: SKLZ) presents a unique game proposition (including game development) while making money at the same time, putting the company in an interesting gray area. In 2021, SKLZ also expanded its portfolio by acquiring Aarki, a leading AI-based advertising and marketing platform, and investing in Exit Games, a company offering multiplayer racing, shooting and fighting games. .

However, with a less than satisfactory track record for FQ4’21 and the recent market correction surrounding tech stocks, market sentiment has clearly lagged, triggering a sell-off and falling SKLZ valuations. Nonetheless, we expect a quick turnaround for fiscal 2022, given its reduced marketing spend and huge potential through cloud gaming and collaboration with the NFL.

The global games market is also expected to grow from $203.12 billion in 2020 to $545.98 billion in 2028, at a CAGR of 13.2%. Additionally, Goldman Sachs Group Inc. has forecast that the online sports betting market in the United States will grow from $1 billion in 2021 to $8.5 billion in 2028, with a CAGR of 35.7%. Since SKLZ blurs the lines between gaming and gambling, we expect the company to do well, despite the cultural stigma attached to it.

Bringing a new dimension to gaming with cloud strategy

In his recent Investor Day presentation, SKLZ CEO Andrew Paradise revealed that the company is developing a cloud-based gaming platform that will be integrated into a playable ad. When a player taps on an advertisement for the SKLZ game, they will be taken directly to the game, instead of being directed to the App Store. The strategy would help it reach new Android users and increase the visibility and penetration rate of the company’s games among new players.

Google Real Money Gambling Application Policy

google

However, in our view, the reason for the cloud strategy has more to do with Alphabet’s (GOOG) corporate policy of not allowing “real money gambling apps”. Based on its policy, “apps that accept or manage bets, in-app currencies, winnings, or deposits in order to wager or obtain a physical or monetary prize” are considered violations. Obviously, this is aimed at SKLZ.

By adopting cloud technology, SKLZ would end up bypassing the Google Play Store, which currently does not accept many games developed with the company’s tools. This would allow the company to reach more Android smartphone users, who accounted for over 70.97% of all smartphones in use globally. This will bring the total addressable market for SKLZ to over 4.71 billion untapped players. As a result, SKLZ’s decision to opt for cloud technology is certainly no accident, given the massive revenue and user acquisition we can expect in the future.

The NFL-themed mobile games are also slated to launch in September 2022, ahead of the NFL season. The NFL and SKLZ have also pledged marketing support for new games, potentially increasing its monthly active users (MAUs) and paying user conversion rate in the future. Additionally, a multi-year partnership between SKLZ and NFL could generate recurring revenue and convert many fans into long-term SKLZ users. With a soft launch slated for March 23, 2022 at the 36th Annual Game Developers Conference, we can expect SKLZ valuations to improve, assuming widespread adoption and engagement.

Given SKLZ’s “100-year vision for building the competitive layer for the internet”, it’s obvious that its ambition extends beyond the gaming industry. We’ve seen the company expand to include sports through its collaboration with the NFL, occasional esports betting and some form of online casino. Additionally, by leveraging the Metaverse concept, we expect SKLZ to easily add another layer of competitive betting in future AR/VR-enabled games in the future.

In the next decade, we also cannot exclude the possibility of group games similar to Call of Duty or Fortnite, where the monetization rate could be much higher and more profitable for SKLZ. Although highly speculative, we also recognize that this would require massive capital that the company does not currently have. Moreover, SKLZ competitors are also free to use similar strategies to monetize their games. As a result, the gaming realm is likely to remain highly competitive, given many deep-pocketed game developers. Nonetheless, we expect SKLZ to capitalize on the growth of mobile games and deliver robust growth going forward, assuming successful execution and strategic capital allocation.

SKLZ blew its marketing budget in fiscal 2021

SKLZ turnover and net income

Skillz turnover and net income

S&P Capital IQ

Over the past three years, SKLZ has seen massive revenue growth with an impressive CAGR of 96.3%. In fiscal 2021, the company recorded revenue of $384.09 million, representing a remarkable annual growth of 66.9%. For FQ4’21, SKLZ also recorded record revenue of $108.9 million, representing outstanding growth of 6.6% QoQ and 60.8% YoY. Additionally, it’s worth mentioning that the company is posting impressive gross margins at 93.6% for FY2021. SKLZ also reported excellent growth for Paid Monthly Active Users (PMAUs) at 56% YoY at 0 .61 million, with average revenue per paying user (ARPPU) increasing 3% year over year to $59.

SKLZ R&D, sales and marketing, and G&A expenditures

Skillz R&D, Sales & Marketing, and G&A Expenditures

S&P Capital IQ

However, SKLZ’s net losses widened to -$99 million in the fourth quarter of 2021, given its aggressive spending on marketing purposes at $155.1 million. The fact that expenses were not reflected in profits alarmed investors and prompted a sell-off tripling the usual trading volume. The consensus believes that SKLZ’s growth may finally be slowing, after the COVID-19 pandemic. Nonetheless, with the company committing to moderating its engagement marketing and user acquisition budgets, we expect operating and net income to improve from FQ1’22 onwards, as reported on the earnings call. from FQ4’21 on February 23, 2022.

SKLZ Cash and Cash Equivalents, Debt and Equity Dilution

Skillz cash and cash equivalents, debt and stock dilution

S&P Capital IQ

However, as the company has yet to report profitability, SKLZ relies on a combination of debt and equity dilution to fund its operations. As of FQ4’21, SKLZ has 399 million shares outstanding, representing a year-on-year dilution of 28%. Additionally, the company raised $300 million of debt maturing in 2026 at 10.25% interest in December 2021.

It is evident that SKLZ has exhausted all of its cash flow from the December 2020 IPO, given its cash and cash equivalents of $241.33 million at FQ4’21. Accordingly, given that the company will not report profitability in the next few years, SKLZ may continue to rely on similar strategies to raise funds.

So, is SKLZ Stock a buySell ​​or Keep?

SKLZ projected revenue, net income and EBIT

SKLZ projected revenue, net income and EBIT

S&P Capital IQ

SKLZ is expected to report an apparent deceleration in revenue growth at a CAGR of 12.44% over the next four years. The historic revenue growth was obviously unsustainable, given how the company achieved revenue of $400 million in fiscal 2022, in line with fiscal 2021 revenue. consensus of $548.78 million and decelerating growth also hurt its stock valuations, as they fell -11% after the FQ4’21 earnings call. Additionally, with ongoing marketing, R&D, SG&A expenses and slowing revenue growth, the consensus is that SKLZ will not generate profitable net profit or EBIT in the next four years.

Nevertheless, after the F4’21 earnings call, SKLZ still maintained its guidance to report EBITDA breakeven by FY2024. Additionally, we should also note that its revenue forecast of $400 million for fiscal 2022 does not include the upside contribution from the NFL collaboration. As a result, we expect an upward revaluation of around 10% or even more for the year, with FQ1’22 earnings expected to beat consensus estimates due to its better control of marketing spend.

We assume that the revenue growth experienced during the COVID-19 pandemic was simply a ripple effect from the lockdown period over the past two years. SKLZ is currently trading at an EV/NTM turnover of 2.11x, below its historical average of 13.92x. Given the market correction surrounding high growth stocks, SKLZ stock is also trading at low prices of $3.14 (as of March 21, 2022). Due to the moderation, we believe that SKLZ is currently trading closer to its normalized valuations.

We would also like to point out that almost all gambling stocks are punished, with DraftKings (DKNG) and Penn National Gaming (PENN) losing -64.39% and -38.26% of their values ​​respectively over the last six months. Even game companies such as Take-Two Interactive Software (TTWO), Sea Limited (SE), and Roblox (RBLX) fell -21%, -65.32%, and -40.88%, respectively, over the same period. As a result, we think SKLZ’s 90% discount from February 2021 highs of $43.72 looks attractive to investors looking for premium prices for speculative gaming stocks.

Of course, those who bought at the highest prices would have suffered maximum losses. We would like to express our regrets, as SKLZ is not expected to reach these levels anytime soon.

Therefore, we rate SKLZ stock as a buy only for long-term speculative investors.