Skillz (SKLZ 1.17%), a leading mobile game platform, is on a rapid growth trajectory. The company offers gamers a chance to compete with each other while the winner receives the prize money. Of course, there is an entry fee to the competition that each participant must pay.
The potential for prize money certainly makes the games more interesting. Indeed, Skillz generates higher engagement from users than other gaming platforms. The alternative to the freemium model, where people can download a game for free and then pay for enhanced in-game features, is sitting well with consumers. And it's one of primary reasons why Skillz is poised for growth.
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Game-on
In fact, Skillz makes itself more compelling than other game providers by giving gamers the ability to wager and win prizes. Naturally, folks are more interested in playing a game if it has the potential to reward you monetary benefits. Moreover, if there is a monetary outcome on the line, you are likely to encounter an opponent who will pay undivided attention to the contest.
Has Skillz been successful with this approach? Absolutely, and its growth engine seems to be just revving up. The company's customer acquisition costs have been comfortably below its long-term customer value. In fact, from 2018 to 2020, Skillz's customer lifetime value exceeded its customer acquisition costs by 3.8 times. That disparity should allow it to increase spending to acquire players given the solid return on investment from that spending. In other words, Skillz has ample room to grow.
The additional players signing up for Skillz should further incentivize game developers to customize games specially made for the Skillz platform. With better game availability, it could attract more players, turning the flywheel faster for Skillz -- and that's a virtuous cycle that should immensely benefit the company over the longer term.
Looking at growth prospects from an industry perspective, the mobile gaming market grew at a compounded annual rate of 23% in the last five years. That growth could get a boost over the next five years from increasingly powerful mobile devices having 5G internet capabilities (that is, with faster speeds) that support the newer games requiring a more robust platform.
Data by YCharts.
What this could mean for shareholders
The growth prospects for Skillz appear promising, and investors have noticed. Skillz is trading at a forward price-to-sales ratio of 21.9 (see chart). That makes it more expensive than other fast-growing companies like Roblox and Roku. Admittedly, this is not an apples-to-apples comparison, but it does highlight what investors are willing to pay for high-growth stocks.
That premium may be justified by the 95% gross profit margin for Skillz. That means if it reaches maturity at a large enough scale, the company could generate healthy operating profits and earnings. Still, it may be too early to come to that conclusion as it is still in the early stages of growth, but the asset-lite business model is showing potential.
The company is still generating losses on the bottom line as it invests in capturing the market opportunity. Net loss in the most recent quarter was $53.6 million compared to $15.5 million in the same quarter a year ago.
Investors should be aware that while Skillz may be poised for growth, it's uncertain if or when it will be poised for profitability. However, if the current difference between customer acquisition costs and customer lifetime value (and its rapid growth trajectory) sustain for much longer, it might only be a matter of time before profits start rising.
