Competitive mobile-gaming platform provider Skillz (SKLZ 6.46%) made headlines Monday morning, announcing a strategic partnership with Exit Games, a move that could change the landscape of gaming for Skillz. Here is what investors need to know and what this could mean for shareholders over the long term.
What does Exit Games do?
Exit Games developed and operates the Photon Engine, a software development kit (SDK) that enables developers to create and run multiplayer games. The Photon Engine has cross-platform abilities, meaning it can power games running on various consoles, PC, and mobile.
More than 578,000 developers use the Photon Engine, including big-time gaming studios such as Glu Mobile, Ubisoft, SEGA, Square Enix, and Oculus. The platform can power real-time gaming seen in popular genres like racing, first-person shooters, battle royale, and combat.
Skillz is investing $50 million into Exit Games for a minority stake, and Skillz CEO Andrew Paradise is joining the board of Exit Games as an observer. The partnership gives Skillz permanent and exclusive access to the company's technology to power gaming on Skillz's platform.
How it will help Skillz grow
For Skillz to succeed long term, it needs to attract developers to create games on its platform, similar to how a company like Shopify attracts merchants. To do this, Skillz has invested in providing a variety of developer tools to make game development on its platform as profitable as possible.
The company offers the infrastructure to host and operate paid games with fair competition (anti-cheating technology). Skillz added to this by acquiring adtech platform Aarki in June for $150 million, giving developers another monetization tool via advertising.
The deal with Exit Games is the latest step in growing these developer tools. The technology from Exit Games will give game developers the ability to build live, multiplayer games on the Skillz platform. Casual games have previously dominated among Skillz-powered titles, but this could change now that live gaming is available to developers.
The most popular mobile games list is littered with names like PUBG Mobile, Call of Duty: Mobile, and Free Fire, which are all battle royale titles that operate in real time. There is no guarantee that a game as big as these launches on Skillz, but the ability for developers to participate in such popular genres is obviously great news.
Much of Skillz's revenue is concentrated among its top few games, such as Blackout Bingo, 21 Blitz, and Solitaire Cube, which account for nearly 90% of total revenue. A new hit game like a first-person shooter or a battle royale title could have a significant impact on revenue growth.
What's the deal for shareholders?
Investors hoping for an immediate short-term boost from the deal with Exit Games will likely be disappointed. New titles can take months or years to develop, test, and launch, so it may not be until next year that we see real-time games begin to show up on Skillz's platform.
However, the long-term impact could be huge, as the Skillz platform is now open to all types of mobile games. Additionally, Paradise has discussed a desire to take the company's technology outside of gaming and into verticals such as exercise and education. Being able to run events in real time makes these new opportunities much more realistic and gives Skillz much more flexibility in pursuing them.
Is Skillz a buy today?
Skillz stock has fallen 70% from its high in February, brining the price-to-sales (P/S) valuation down to 14 using management's 2021 revenue guidance of $389 million. The stock has high short interest with 20% of shares held short, which could help explain why its price has been under pressure for much of the year.
Second-quarter revenue increased 52% year over year to $89.5 million, and full-year guidance would imply revenue growth of 63% from 2020 (excluding the Aarki acquisition). Though high, the current P/S ratio is common for companies growing as quickly as Skillz.
Investors need to monitor its ability to increase the number of paying users on its platform, its upcoming expansions into India, and the success of new gaming genres -- all signs that Skillz is building out its platform. The Exit Games partnership is a big step in the right direction.