03 Sep Skillz Inc : Real Potential or All Hype?
Skillz, Inc. (NYSE: SKLZ) is a mobile gaming platform that hosts esports tournaments that have a prize component, essentially allowing users to compete against each other for prize money. The Company uses patented technology to enable developers to create multi-million-dollar franchises and host social competitions that bring together gamers, mobile players and esports enthusiasts worldwide.
The Company’s portfolio of games includes Solitaire cube, 21 Blitz, Blackout Bingo, Pool Payday, Dominoes Gold and 2 Minute Football to name a few. However, it has two prominent developers namely Tether and Big Run and only three games (Tether’s Solitaire Cube and 21 Blitz, and Big Run’s Blackout Bingo) which generate over 79 percent of its revenues.
Skillz, Inc. (NYSE: SKLZ)
Market Cap: $4.99B; Current Share Price: 12.37 USD
Data by YCharts
Strengths
Skillz has a registered player base of over 30 million and more than 20,000 game developers. The platform hosts more than 3.5 million daily tournaments and disburses over $ 60 million in monthly prizes. Furthermore, the platform enables game developers to create long-term sustainable businesses and offers features such as leagues and leaderboards, multiplayer tournament options and multiple prizes and trophies.
A developer can download a free SDK and set up tournaments on the Skillz platform. In addition, a streamer can broadcast more than 5 live tournaments simultaneously through a dynamic overlay. The platform also allows for in-app payments and analysis of game performance through a single dashboard.
Skillz is redirecting its focus on creating engaging content to attract customers, additionally, the company is also looking at getting sponsorship deals for the tournament’s prizes as well as strategic partnerships to enable it to expand to new verticals and geographies. In February 2021, the Company entered into a multi-year gaming agreement with the National Football League (NFL) to host a global game developer challenge to develop an NFL-themed mobile game.
Image Source: Company
The Company looks well poised to make the most of these opportunities and create an impression on the esports market.
Weakness
The COVID-19 pandemic provided impetus to companies like Skillz, as Casinos around the world faced temporary closure on account of stringent lockdown restrictions. Skillz was able to capitalize on the growing demand for online gaming services and added 209,000 new monthly paying players (MPP) between its fiscal first quarter of 2020 and Q1 2021, taking its total up to 467,000 and registering eight consecutive quarters of growing MPP. However, with the economy opening up and people finally being able to pursue outdoor activities, the Company reported a loss of 4,000 MPP in Q2,2021.
The Company spent nearly 113 percent of its revenue on sales and marketing activities to acquire new customers during Q1 and Q2,2021. In total, the Company has spent $196 million in sales and marketing expenses during the six months ended June 30 and has made $173 million in revenue.
Opportunity
The advent of the Smartphone has revolutionized the gaming industry. There is an exponential rise in the number of gamers, which now stands at about 2.3 billion gamers worldwide. According to a report by Newzoo, the global games market which was valued at $137.9 billion in 2018 is likely to reach $180.1 billion in 2021, growing at a CAGR of 11%. Mobile games will contribute to 59 percent of the total or over $106.4 billion by 2021. Mobile and Tablet gaming alone contributed to over $70.3 billion in 2018.
Asia-Pacific regions will drive the growth in the market, with a steadily increasing smartphone user population, generating $71.4 billion or 52 percent of total global game revenues. Countries such as China, which is the number one gaming market, and Japan are the largest spenders on mobile games, with average spend per player in Japan being 1.5 times higher than in North America and more than 2.5 times higher than in Western Europe. In addition, China alone will contribute to more than 25% of all global game revenues, with over $37.9 billion revenues in 2018.
North America is the second-largest market for games with a year-on-year growth rate of 10% and nearly $32.7 billion in 2018. There were similar trends in the Europe, Africa and the Middle East Market, which generated combined revenues of $28.7 billion in 2018. Though lacking in average spends per player, this segment will witness a steady growth in the Smartphone population, making up for the revenues.
The Global esports market revenue is projected to reach 1.62 billion U.S. dollars in 2024 from 1.08 billion U.S. dollars in 2021 according to a report. The growth in the industry will be primarily driven by the growing popularity of gaming in the mainstream culture, technological advancements and improved infrastructure, the emergence of professional esports teams and leagues and the impact of COVID-19 on the gaming industry.
Threats
The Company’s competitors such as Unity have a much more diversified business and better revenues than Skillz. Most importantly, the Company does not have many major video game publishers on its platform when compared to Unity. While none of Unity’s game publishers account for more than 10 percent of its revenue, Skillz has two prominent developers namely Tether and Big Run and only three games (Tether’s Solitaire Cube and 21 Blitz, and Big Run’s Blackout Bingo) which generated over 82 percent of its revenues in the first half of 2021.
A high level of customer concentration on just a few developers and games may prove detrimental to the interest of the company. The loss of monthly active users was somewhat offset by a 74 percent increase in average revenue per user (ARPU)
The competitor also offers a more sustainable business model and generates most of its revenue from subscription fees, usage-based fees and revenue sharing, while Skillz retains 50 percent of revenue from an app generated on its platform, which could drive away developers to more cost-effective alternatives.
Conclusion
In June 2021, the Company announced that it has entered into an agreement to acquire Aarki with the aim to create a fully integrated Esports advertising platform. The Company believes that it will help gain a foothold in the mobile gaming industry. Skillz seeks to leverage Aarki’s advanced advertising capabilities, which are powered by cutting-edge machine learning algorithms. The Company has also signed a strategic investment and partnership agreement with Exit Games, the owner of Photon, which enables real-time gaming and paves the way for launch of a similar genre on the platform.
The Company is taking some positive steps such as partnering with an established and popular developer such as Play Mechanix for Big Buck Hunter, an NFL-themed mobile game and the developer of Trivia Crack. These could help attract new users to the platform. Skillz is also expanding to other countries and is likely to be launched in India by the end of 2021.
However, the Company will have to face stiff competition from established demand-side platforms and plenty of other mobile advertising agencies to make an impact in the industry. Skillz will have to address issues such as developing a more diversified game portfolio, rising losses and improving its business model to attract more developers to the platform.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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References
https://www.statista.com/statistics/490522/global-esports-market-revenue/
https://www.grandviewresearch.com/industry-analysis/esports-market
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