Skillz's (SKLZ -0.30%) stock recently tumbled after it posted its first-quarter earnings. The online gaming platform company's revenue surged 92% year over year to $83.7 million, beating estimates by $3 million. But its net loss widened from $15.5 million to $53.6 million, or $0.15 per share, and missed expectations by two cents. On an adjusted EBITDA basis, its net loss widened from $14.6 million to $31.1 million.
Skillz's losses overshadowed its robust revenue growth, and the stock remained below its initial opening per-share price of $17.89 last December. Skillz went public via a merger with a SPAC instead of a traditional IPO, but it's been a battleground stock for the bulls and bears ever since.
The bulls claim Skillz's platform is disruptive because its matchmaking arena makes it easier for mobile game makers to host multiplayer games. It also helps developers award prizes, process in-app payments, and monitor the overall performance of their games.
The bears believe Skillz's customer base is too concentrated, it's exaggerating its long-term growth potential, and it has no meaningful path toward profitability. They'll also note that the stock is expensive and getting even pricier with dilutive secondary offerings and stock bonuses.
Let's weigh both arguments and see where the stock could be headed over the next year.
Skillz is still growing rapidly
Skillz's revenue rose 92% to $230 million in 2020. It previously guided for 59% revenue growth in 2021, but it now expects 63% growth.
It attributes that higher guidance to the improved monetization of its users, its expansion into new genres beyond card and bingo games, the growth of its Android audience, its overseas investments, and a new NFL partnership that could encourage developers to create NFL-themed games on Skillz.
Skillz also believes Apple's new iOS privacy measures, which require users to opt-in to data tracking features, could generate fresh tailwinds as developers rely more on in-app transactions instead of targeted ads.
Skillz's paying monthly active users (MAUs) grew 81% year over year to 467,000 in the first quarter. That equals a "paying to playing" MAU ratio of 17%, which it claims is eight times higher than the industry average for mobile games and highlights its "powerful competitive advantage."
Its gross merchandise volume (GMV), or the value of all transactions on its platform, increased 85% year over year to $566.6 million. Its take rate, the percentage of each transaction it retains as revenue, also expanded from 14.2% to 14.8%.
As a result, Skillz's average revenue per paying user (ARPPU) grew 7% to $60, as its total average revenue per user (ARPU) jumped 86% to $10.35.
But can it solve its biggest problems?
Skillz's growth is impressive, but it's still heavily dependent on three games -- Tether's Solitaire Cube and 21 Blitz, and Big Run Studio's Blackout Bingo -- which together generated 79% of its revenue last year. After including the two studios' smaller games, Tether and Big Run accounted for 87% of Skillz's top line.
Skillz hasn't disclosed how much revenue those hit games generated in the first quarter, but it said games from its "top developers" accounted for 42% of its top line.
That lower percentage, along with the introduction of new Skillz-powered games like N3TWORK's Tetris Clash, Hidden Pixel's Pool Payday, and Grey Square Games' Dominoes Gold, might alleviate its customer concentration issues. Skillz also believes its platform can eventually host more demanding genres like battle royale games.
However, Skillz's total MAUs still only grew 4% year over year to 2.7 million in the first quarter. That's a tiny sliver of the 2.7 billion mobile esports gamers which Skillz often cites as its total addressable market. That sluggish growth indicates Skillz could remain a niche platform for smaller games as bigger publishers launch their own multiplayer gaming networks.
Meanwhile, its user acquisition marketing costs surged 101% year over year to $54.3 million during the quarter. It intends to gradually reduce those costs, but it probably won't narrow its losses anytime soon.
Skillz doesn't have any debt, but that's mainly because it raises cash by selling more shares and subsidizes its salaries with stock bonuses. It ended the quarter with 447.9 million shares, up from 427.7 million in the fourth quarter, and it recently priced a fresh offering of 32 million shares.
Skillz's stock isn't cheap at 16 times this year's sales, and its ongoing dilution could keep its price-to-sales ratio elevated. That high valuation, along with its other weaknesses, could make it an unappealing investment as investors continue to rotate from growth to value stocks.
The bottom line
Skillz's platform offers game developers an easy way to host online tournaments for cash prizes, but its wobbly business model still makes it a risky investment.
Skillz will likely remain a battleground stock over the next year as it tries to diversify its customer base, reduce its user acquisition costs, and monetize more of its users. It still has plenty of growth potential, but its stock will tread water until it definitively counters all those bearish arguments.