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Skillz Is Sending a Signal That Could Attract Developers

By Parkev Tatevosian, CFA – Aug 17, 2021 at 10:45AM

Key Points

  • Skillz spent a whopping 108% of revenue on sales and marketing.
  • Skillz made investments that make it easier for developers to make money on the platform.
  • Skillz stock is down nearly 40% year to date, and the aggressive spending could be one reason.

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The company went on a spending spree in its fiscal second quarter.

Skillz (SKLZ 7.44%) is a unique gaming company, allowing players to wager on games played against each other. Of course, playing a game with money on the line makes it more interesting. 

Admittedly, wagering on games is not for everyone. Indeed, most of Skillz's players have not deposited any money or made any wagers while playing games on the platform. The company is making investments to cater to both categories of players by attracting developers to its platform.

Three males watching a smartphone.

Image source: Getty Images.

Increasing capabilities

In its fiscal second quarter, Skillz announced the acquisition of Aarki, a demand-side advertising platform with substantial scale in mobile gaming. The purchase will help the company bring in more players and give game developers on its platform better marketing capabilities. Moreover, the acquisition is a step toward Skillz's monetizing nonpaying players. In other words, it could eventually start making money from players even if they never make a deposit -- something it has not been doing thus far.

Skillz also announced a strategic investment into Exit games. The deal gives Skillz access to advanced multiplayer servers and speeds the development of new game genres on its platform, such as battle royale.

Attracting new users and converting existing users 

This was another quarter where Skillz spent heavily on user acquisition. In fact, the high spending spooked investors. In Q2, Skillz spent $99.5 million on sales and marketing. To put that figure into context, the total revenue for the quarter was $89.5 million. Skillz spent an incredible 108% of revenue on marketing. According to management, Skillz customers' long-term value exceeds its acquisition costs by 3.8 times. With such favorable returns on investment, it's no surprise management is leaning heavily into marketing.

However, not all of the company's $99.5 million was spent on trying to acquire new players. A part of that ($44.9 million) was spent trying to convert nonpaying players into paying ones. For instance, Skillz may offer an existing user who has not yet deposited a first-time-depositor bonus.

Sending a message

Game developers are a big part of the flywheel at Skillz. The more games offered on the platform, the more players are attracted to its app. Developers can offer a form of organic marketing the company does not have to pay for. If a developer creates a popular game on the platform, it can create a natural buzz in the gaming community that brings in new players. 

All the spending mentioned above sends a message to game developers. Skillz management is communicating its intention to be a serious player in the mobile gaming arena for the long term. It's building a foundation that developers can piggyback off of to make a living making games.

The stock is down nearly 40% year to date. Shareholders were not pleased with the aggressive spending. The sell-off may also be due to reopening economies and worries about how they might affect engagement on the site.

It remains to be seen how the message is received and if it attracts a flurry of game developing activity on the platform. If it does, then this will be money well spent, and investors might regret selling shares. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skillz Inc. The Motley Fool has a disclosure policy.

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