Unity Software (U 0.74%) and Skillz (SKLZ -2.80%) both simplify the development of video games. Unity's game engine is used to develop over half of the world's PC, console, and mobile games. Unity provides all the necessary tools to develop a game and launch it across multiple platforms, as well as tools for integrating ads, processing in-app purchases, hosting multiplayer games, and analyzing player data.
Skillz's platform hosts multiplayer games and tournaments for mobile games. By adding a few lines of code, developers can integrate multiplayer features in their games without building them from scratch. Skillz also provides tools for processing payments and analyzing data.
Unity and Skillz both went public last year, but the former has generated much bigger gains than the latter. Unity went public at $52 last September, and its stock is now trading in the mid-$120s. Skillz went public by merging with a SPAC (special purpose acquisition company) last December. It started trading at $17.89 on the first day, but it's now only worth about $11 per share.
Let's see why Unity outperformed Skillz by such a wide margin, and whether or not it will remain the superior stock over the long term.
How fast are Unity and Skillz growing?
Unity is bigger than Skillz, but Skillz is growing at a faster rate. Unity's revenue rose 43% to $772 million in 2020, and it anticipates another 35% to 37% growth this year.
Skillz's revenue rose 92% to $230 million in 2020, and it expects 69% growth this year. Excluding its planned takeover of the ad-tech firm Aarki, it anticipates 63% growth on a stand-alone basis.
Neither company is profitable by GAAP or non-GAAP measures yet, but Unity's bottom line growth looks healthier. Unity's non-GAAP net loss narrowed from $113 million in 2019 to $66 million in 2020, and analysts anticipate another narrower loss this year. Skillz's adjusted EBITDA loss widened from $23 million in 2019 to $66 million in 2020, and analysts expect an even wider loss this year.
Unity's stock trades at 32 times this past year's sales, while Skillz's stock looks cheaper at 12 times sales. However, Unity arguably deserves to trade at a higher valuation than Skillz because its business is larger and more diversified, its revenue growth is more stable, and it's narrowing its losses.
Unity's strengths highlight Skillz's weaknesses
Unity serves a lot of major video game publishers, but none of them account for over 10% of its revenue. In the second quarter of 2021, 888 of its customers generated more than $100,000 in revenue over the past 12 months -- up from 716 a year ago.
Skillz, on the other hand, generated a whopping 87% of its revenue last year from just two video game publishers: Tether and Big Run. Three games -- Tether's Solitaire Cube and 21 Blitz, and Big Run's Blackout Bingo -- brought in most of that revenue. Skillz still generated 82% of its revenue from those two studios in the first half of 2021.
That customer concentration makes Skillz's business much more fragile than Unity's. Skillz's total monthly active users also fell 4% year over year to 2.5 million in the first half of 2021, which suggests its three core games are losing their luster. Skillz offset that decline by growing its average revenue per user (ARPU) by 74% -- but it could be in trouble if its ARPU growth stalls out.
Unity's business model seems more sustainable than Skillz's. Unity's Create Solutions business, which hosts its main game engine, generates most of its revenue from subscription fees. Its Operate Solutions business -- which provides in-app ads, multiplayer features, analytics, and other tools -- offers revenue-sharing and usage-based plans.
Skillz generates most of its revenue by retaining a 50% cut of an app's revenue generated on its multiplayer platform. That's significantly higher than the standard 30% cut charged by other mobile app stores, and could prevent Skillz from expanding beyond its three main games.
A clear future versus a murky one
Unity's early-mover advantage in the gaming engine market will ensure it grows alongside the global gaming market. It's already been growing at a faster rate than the industry, driven by its ability to cross-sell additional services to its current customers, and it expects to turn profitable on a non-GAAP basis by 2023.
Skillz's future looks murkier. It plans to expand beyond its three main games by entering new genres like battle royale and racing games, but many of those top games already run on their own multiplayer platforms.
Skillz believes its upcoming takeover of Aarki will form the foundation of an "integrated esports advertising platform" and expand its advertising ecosystem beyond its own platform and onto other apps. However, Aarki could still face plenty of competition from larger demand-side platforms like The Trade Desk and other mobile advertising networks.
The winner: Unity
All this suggests that Unity is a better investment than Skillz. Skillz might still have room to grow, but its customer concentration issues, wobbly business model, and widening losses all make it a more dangerous investment.