Here's a little more. I don't want to get into trouble here, so if anyone wants the full text, feel free to sign up for a membership with Motley Fool. It's been my personal experience that they have pretty good track record in stock picks. One always has to do their own DD though. ................
Skillz (NYSE: SKLZ) is one such business, and I'm really excited about its prospects right now. The company has a passionate co-founder/CEO and a valuable and popular product in its video gaming platform. It's in a booming growth market and has strong financials with plenty of optionality. Skillz has a lot of room to grow and has a good shot at becoming a colossus in the video gaming space. I think it'll reward shareholders along the way with outstanding returns.
The Big-Picture Opportunity
People around the world have been in dire need of fun entertainment options over the past year, and increasingly, video games have become the go-to option for kids and adults alike. Playing video games has passed up reading books, listening to music, and going to movies as the second-most-popular form of entertainment, trailing only watching television. With an addressable market of nearly $150 billion, the video game industry is playing to win, as growth rates are far faster there than in the TV business, especially in gaming on mobile devices.
Yet as Skillz CEO Andrew Paradise discovered, the business model that most game developers and promoters have followed to date creates a less-than-ideal playing experience for gamers. Most mobile platforms still feature long and tedious ads that interrupt game play. In-game purchases turn off players by essentially forcing them to spend money for a fair chance to win, locking out content for users without the wish or ability to pay.
At the same time, game developers are finding it harder and harder to emerge from a growing competitive field. The number of developers has jumped from 30,000 in 2009 to more than 10 million today. Even great games have trouble getting noticed and achieving the critical mass necessary to make money for their creators.
All of that frustrated Paradise, and he helped create Skillz in 2012 to come up with a better way. With one simple idea, Paradise turned the tables on the gaming industry and built a whole new business model with huge advantages for players and game developers alike.
Why We're Excited About Skillz
Paradise's idea was to build a platform that would allow video gamers to face each other in competitive events. Gamers pay a modest entry fee for the chance to claim cash prizes if they win. Skillz holds back a portion of the total prize pool for itself and for the developer of the game.
By feeding into gamers' desire to match wits against live opponents, Skillz created an experience that resonates with the entire video gaming community. At the same time, game developers have the chance to showcase their creations on the Skillz platform — and also to collect some valuable cash from the revenue-sharing arrangement the company offers them.
As simple as Paradise's idea was, it took strong execution to make it work. The CEO/co-founder knew that he had to build trust among players, so Skillz has patented proprietary methods for detecting cheating and other forms of fraud. Also, players get ratings on the platform, which then pairs opponents to ensure fairly close skill-level matching.
For game developers, Skillz takes care of all the back-office operations, including payment processing and prize fulfillment, customer support, and IT capabilities. Further, the company offers game developers analytical insight to help them identify successful trends.
Skillz has already tapped into massive growth with the platform. In just two years from 2017 to 2019, gross marketplace value jumped more than sevenfold to $886 million. Skillz is already well on its way to nearly doubling that figure for 2020 and expects it to climb to nearly $3.8 billion by 2022. The relationships Skillz has with game developers have also blossomed. The company now has 34 games generating $1 million or more in GMV annually, up from just seven only four years ago.
Meanwhile, the company has consistently kept its take of entry fees at 14% to 15% even after paying game developers their cut. That's keeping revenue growing at the same strong pace as GMV, and with high gross margins of 95% and no debt, Skillz is maximizing financial efficiency and long-term profit potential.
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Paradise is committed to Skillz, and his large financial stake in the company shows it. In the going-public merger Skillz did with special-purpose acquisition company Flying Eagle Acquisition, the CEO/co-founder held onto roughly 22% of the company's shares. That supervoting stock is worth roughly $2.3 billion today and gives Paradise 84% voting control of Skillz.
Paradise has also built a strong corporate culture at Skillz. The company has earned a 4.2-star rating out of 5 at Glassdoor, with 85% of workers approving of the CEO's work. Reviews emphasize a fast-paced environment with challenging but rewarding work as well as the success of the recent SPAC merger.
Why Now
Paradise was prescient in seeing that mobile gaming in particular would grow as quickly as it did. Back in 2012, mobile represented only a tiny portion of the overall video gaming market. Now, the mobile side of the industry has a growth rate of 20% that's absolutely crushing the rest of the entertainment industry.
The Skillz platform has been extremely popular during the COVID-19 pandemic. On average, users are spending more than an hour a day on Skillz, which is more than even well-known social media favorites like Facebook (NASDAQ: FB) and TikTok. The business model is also a cash cow, with average revenue per user coming in at $6.30 in 2019. That was more than triple Glu Mobile's (NASDAQ: GLUU) ARPU figure and more than 4 times as large as Zynga's (NASDAQ: ZNGA).
I'm also excited about the untapped potential that Skillz has. Expanding to the Google Play app store is already supplementing current iOS-based revenue. Adding new types of games and expanding internationally could open up a $125 billion opportunity for Skillz, which is looking at India as a key future market. Moreover, Skillz is also looking at expansion into areas like interactive fitness competitions and education, which could boost its prospects even further.
Potential Business Risks
Skillz does face some potential challenges. In some markets, gambling is prohibited, and while the company has done extensive work to demonstrate that its competitions are skill based rather than luck based, Skillz could find itself having to litigate the issue. No one wants to see a repeat of what happened with online poker in the 2000s, which resulted in the banning of promising companies from the U.S. market.
In addition, competition in video gaming is fierce. Tech giants like Amazon.com (NASDAQ: AMZN), Sony (NYSE: SNE), and Microsoft (NASDAQ: MSFT) all have a lot of turf to protect, and they have the resources to make things difficult for Skillz.
Finally, the stock remains highly priced at more than 50 times trailing revenue. Investors need to be prepared for volatility, as a sharp decline from the stock's all-time highs in early February has already shown.
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