Skillz (NYSE:SKLZ) is a unique online multiplayer gaming platform that facilitates users placing wagers in a number of mobile games. The games Skillz is incorporated into generally require, well, skill, to play so there's more involved with the wagering that takes place than just gambling. That puts the company in a sweet spot between popular free-to-play games and more traditional games of chance.
The ability to wager also holds the potential to raise interest in the games that Skillz operates in, for both the users and the various game developers Skillz works with. Who wouldn't want to win a game with a monetary reward? And what developer wouldn't want to enhance interest in their games and attract more users?
Let's take a closer look at this company's two main competitive advantages.
1. More fun to play
The company's software facilitates other entities' ability to hold eSports tournaments using various mobile games and it includes wagering options. It also enables users to generate gameplay clips and highlights, and it can record and broadcast gameplay. It generates revenue by charging for these various services.
Skillz's strategic placement puts it in a good place. Not offering games of chance itself means it skips many of the regulatory hurdles facing industries like online sportsbooks and daily fantasy sports. Meanwhile, running games with monetary outcomes gives it an advantage against free-to-play games, for at least two reasons.
First, Skillz doesn't rely on showing advertising to players to generate its revenue, which is good since ads can interrupt gameplay and reduce customer engagement. Second, players will be more engaged and take the gameplay more seriously if there's actual money on the line. It's less likely players will encounter an opponent who's just fooling around and not playing to win.
Furthermore, the company's algorithm matches players by skill level, so games are less likely to be one-sided.
2. Higher return on investment
The benefits are starting to show up in the numbers. For instance, players tend to spend almost twice the amount of time on Skillz-connected games than on the leading free-to-play competitor for those games. Moreover, users spend more time per day on Skillz than on Alphabet's YouTube or on Facebook.
Skillz is confident in its advantage. The company boosted its spending on user acquisition from $16.3 million in its fiscal fourth quarter of 2019 to $40.5 million in Q4 2020. The thinking is that once players know about or experience the platform, they'll enjoy it enough to make the investment pay off.
Management has been right on that assessment so far. Long-term customer value has outweighed acquisition costs almost four times over from 2018 to 2020.
What it could mean for investors
Skillz's competitive advantage on both fronts could allow it to gain market share for several years in a gaming industry that's grown at an estimated 14% compounded annual rate over the past five years, vastly outpacing movies, books, and television industry growth. Technological innovations such as faster processors and better screens are making it increasingly enjoyable to play games, which holds the potential for even further growth.
Given that it could continue sustainably gaining share in a growing industry, Skillz could be poised for several years of growth. Moreover, the company's position as a middleman between gamers and developers means it can reach profitable economies of scale. If you strip out user acquisition marketing from the most recent quarter, adjusted EBITDA was 25%.
Certainly, the pandemic has accelerated the industry's growth, as folks were spending more time at home. As economies reopen, the growth rate could slow down. But even if so, Skillz has plenty of competitive advantages to help it ride out any volatility. Investors looking for a fast-growing stock can add Skillz to their list of growth stocks to watch.