For a long time, several high-growth companies have opted to prioritize market share over profitability. This means that many of these companies take a long time to reach breakeven and achieve operating leverage. Some, however, end up destroying capital, and some even go bankrupt. To create wealth, retail investors must learn to separate the wheat from the chaff -- growth companies that create long-term value from those that destroy shareholder value.
Shares of mobile gaming and esports platform company Skillz (SKLZ 0.96%) are currently down by over 89% from their all-time high of $46.30 on February 5, 2021. The company is now seen as a high-risk speculative investment, especially because of portfolio concentration, rising competition, and huge losses. The weak sentiment surrounding high-growth stocks in the face of increasing interest rates also did not help the company.
However, things may now be on the cusp of change, considering that since November 2021, four insiders, including the company's CEO Andrew Paradise, have purchased close to $7 million of the company's shares. With insiders having a much better view of the company's goals and strategies, it may be a signal for investors to consider evaluating this highly corrected stock as an investment opportunity.
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The potential turnaround in the pace of user acquisition
Skillz offers a software gaming platform to multiple independent game developers, who then host several games of skill (not chance) and competitive tournaments for players across the world. By focusing on the platform infrastructure and outsourcing game development, the company reduces the risk associated with the failure of a game. The company withholds 16% to 20% of total entry fees paid by players as commission and then shares a portion with game developers.
While Skillz faced some challenges increasing its overall user base in the second quarter, the company seems to have come back on track. In the third quarter (ending Sep. 30, 2021), the company's monthly active users (MAUs) reached 3 million, an all-time high. The company has been quite successful in converting its user base into paying users. Paying monthly users were 510,000 or 17% of total MAUs. Skillz has also improved the monetization of these paying users, as evidenced by a 15.5% year-over-year jump in average revenue per paying user to $66.82 in the third quarter. In case Skillz manages to continue the momentum in user expansion in the fourth quarter, it can have a very positive impact on the company's share prices.
Multiple ways to control costs
Skillz has been very successful in growing topline (70% year-over-year to $102.1 million in the third quarter), yet investors remain worried about the company's aggressive selling and marketing spend (110% of the total revenues in the third quarter). The company expects to continue its aggressive spending on user acquisition and engagement marketing in the fourth quarter.
Skillz is relying on the acquisition of mobile gaming market-focused global demand-side advertising platform Aarki to play a major role in reducing its customer acquisition costs (cost per install or CPI). The company expects the Aarki integration to complete in the next four to eight quarters. Then Skillz plans to redirect marketing spend used to buy ad impressions away from external demand-side platforms to Aarki, which has access to more than 465 million monthly users. Access to Aarki's first-party data will also improve the targeting potential of these advertisements, thereby leading to improved paying user conversion rates. Finally, the deal may also improve the company's negotiation power with external demand-side platforms. Hence, while these benefits may take a few quarters to materialize, the Aarki deal may ultimately help catapult Skillz to profitability.
New games and new markets can accelerate growth
Investors have been concerned about the absence of high-quality, multiplayer games on the Skillz platform. However, this may soon change since the company has now partnered with the leader in synchronous gaming technology Exit games. The company can now enable game developers to create real-time, synchronous multiplayer games across lucrative genres such as racing, fighting, and first-person shooter for its platform.
Skillz and the National Football League (NFL) have together launched a global game developer challenge. The winning NFL-themed mobile games will be released on Skillz's esports platform. This deal is expected to give Skillz ready access to NFL's large user base while also improving its brand positioning.
In January 2022, Skillz launched a pilot version of its mobile gaming platform in India. This can emerge as a major tailwind for the company, considering that the country is the fifth-largest mobile gaming market in the world.
In the third quarter, Skillz launched a mobile version of the arcade shooting game Big Buck Hunter: Marksman. The game topped the list in the sports category on the App Store in October 2021. The 14-year old Big Buck Hunter franchise still enjoys strong loyalty. Hence its mobile version is expected to boost the company's user base in the coming quarters.
A risky but attractive investment
Despite the many possibilities of share price appreciation, the fact remains that Skillz is a young company struggling to reach profitability. It carries significant execution risk and is undoubtedly a speculative investment.
However, if management succeeds in maintaining topline growth while reducing user acquisition costs, Skillz may see a dramatic share price appreciation in the coming years. Against this backdrop, long-term retail investors with a higher-than-average risk appetite may consider going for this stock in 2022.
