In September 2020, mobile-gaming platform Skillz (SKLZ -1.87%) announced it was going public via a special purpose acquisition company (SPAC). As of this writing, the stock trades almost exactly where it traded then. But it's been a colossal roller coaster ride to get here. At one point, shares of Skillz were up more than 300%. But they're now down 75% from their high earlier this year.

Whether Skillz stock was overvalued then or undervalued now isn't the issue. The matter at hand is where the stock is going from here. And to this, I can say something with certainty: If Skillz is going to return to its former glory, it's going to have to grow its business substantially. And right now, it's being held down by the limited game genres available on its platform. 

A woman plays a game on her phone while reclining on a couch.

Image source: Getty Images.

The problem in tangible terms

Skillz doesn't create games. Rather, it provides a software kit for developers to launch games on its platform. The company helps these developers monetize their games by adding a cash-prize element to one-on-one competitions. Therefore, to grow its user base, Skillz depends on developers to launch games that will resonate with users.

As of the second quarter of 2021, just three games were responsible for a whopping 73% of Skillz's revenue. These are Solitaire Cube, 21 Blitz (both card games), and Blackout Bingo (essentially a matching game). Granted, games generating over $1 million in annualized gross marketplace volume (GMV) are increasing nicely. In the second quarter, there were 43 of these million-dollar games -- up 29% year over year. But that's still a lot of revenue coming from just the top three games.

Skillz's problem is bigger than this. At the end of the first quarter of 2021, the company had 2.7 million monthly active users, of which 467,000 were paying users. This is a minuscule sliver of the total gaming market, giving investors high hopes its user growth would be easily sustainable. But for the second quarter, the company slipped to 2.4 million monthly active users and just 460,000 paying users. Seeing user declines this early in the game is a troubling sign. 

However, you might not be correctly picturing the composition of Skillz's user base. We often think of teenage and young adult men as the prime gamer demographic, but its games attract a different demographic entirely. Of its current users, 57% are women and almost half are between the ages of 36 and 55.

On one hand, this is good for Skillz. Its games are resonating with demographics that are perhaps underserved by other companies. On the other hand, the company needs to attract more users from a more dedicated gaming crowd to grow from here. But it can't really do that until it can offer something called synchronous gaming. 

A person appears to win a game being played on a phone.

Image source: Getty Images.

What is synchronous gaming?

Play any game on Skillz today, and it will be asynchronous. In other words, you'll compete against another player by taking turns. There are genres of games that this works fine with (card games, for example). But other genres like racing and fighting games need to be played in real time -- synchronous -- and Skillz hasn't been able to offer that yet.

Don't misunderstand: Skillz has been working on this for a long time. But this technology is hard to offer. Even just a small delay could result in an advantage for one player over another and detract from the fairness of the platform. Therefore, if you're going to launch synchronous gaming, you better be sure your tech is up to snuff. 

Of course, if Skillz did launch synchronous gaming capability, it would likely attract new developers to the platform almost immediately and, as a result, a new demographic of users. These are two things the company needs to happen if it's going to be a great long-term investment.

This is why its recently announced partnership with Exit Games is so important. Exit Games is further along in solving the synchronous problem, and it already powers multiplayer games for big companies such as Electronic Arts. Therefore, Skillz made the prudent choice to speed up synchronous gaming development by partnering with a leader.

Next move

It's important to manage expectations. The launch of synchronous gaming shouldn't cause Skillz stock to skyrocket back to its previous high overnight. It could be a long time before shares are reaching new heights. 

However, shareholders should remember that stock price tends to follow revenue and earnings growth over the long term. And for Skillz to grow its top and bottom lines sustainably, it needs to attract more game developers and more users. The launch of synchronous gaming can play a role in helping it do just that. But it could be years before we know whether the company has succeeded or failed at this.