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Why Acquiring Aarki Is Good News for Skillz

By Parkev Tatevosian, CFA – Oct 3, 2021 at 8:48AM

Key Points

  • Skillz spent a whopping 111% of revenue on sales and marketing in Q2.
  • Aarki can open a new revenue stream for Skillz.
  • Skillz can benefit from allocating its marketing dollars to Aarki.

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Gaming platform Skillz is spending aggressively on marketing; Aarki can make that task more effective.

For those unfamiliar with Skillz (SKLZ -2.80%), it is a gaming platform that brings players together in competition. Skillz is different from other platforms because it allows players to put money on the line in these contests. In other words, you can win or lose money playing games on the Skillz platform. 

The company is in its early stages of growth as it invests in building its infrastructure, adding players to the site, and attracting developers to create games for its platform. To help it accomplish this, Skillz paid $150 million for demand-side advertising business Aarki -- which will primarily help with player acquisition -- back in June. That deal finalized last month. 

A man looking at his phone and cheering.

Image source: Getty Images.

Skillz is spending aggressively

Interestingly, Skillz already boasts 2.4 million monthly active players, of which roughly 46,300 are paying players. Active players are down 6% and paying players are up 53% from the same time last year. The company does offer free-to-play on its site in addition to wagering on games.

While the company is making progress in adding players, investors are concerned with the high costs of player acquisition. Despite the high prices, management is spending aggressively on sales and marketing, which totaled 111% of revenue in its fiscal second quarter of 2021. Looking at the growth in monthly active players compared to the level of marketing spending, the results are less than spectacular.

This is where the acquisition of demand-side advertising platform Aarki could prove helpful. 

The benefits of Aarki acquisition for Skillz

First, Skillz will begin directing more of its marketing spending to Aarki in the coming quarters, thereby saving on the fees other demand-side platforms charge Skillz for buying impressions. It will also help lower costs for purchasing advertising because Skillz will gain negotiating power with external demand-side platforms.

Further, Skillz expects to increase the effectiveness and efficiency of its marketing spending through Aarki by integrating its first-party data with the advertising platform, thus allowing better targeting of its spending. Given the 111% of revenue Skillz spent on marketing and the unimpressive return on that investment, this area has lots of room for improvement. 

Finally, through the acquisition of Aarki, Skillz could sell its advertising inventory. The company only generates revenue from paying monthly active users, choosing not to sell them advertising. Adding Arki makes that a possibility soon, opening up a new revenue source for Skillz.

Overall, the acquisition looks to be a good fit. And management seems to think it will have a potential long-term impact: "We expect this transaction to result in significant savings over time, which can be reinvested to acquire more users and accelerate growth. Looking longer term, we now have a broader product offering, including media buying capabilities that will enable us to better serve the game developers who work with us."

The market is not impressed with Skillz 

Based on the stock price, it seems the market has not been impressed with Skillz's efforts. Management's aggressive spending with little to show for it has been concerning. The stock price is down 44% year-to-date and 54% just in the last three months. The stock is trading at a price-to-sales ratio of 12, which is less than half of what it was selling for earlier in the year and the cheapest it has been all year.

It is worth putting Skillz on your watch list and observing how this purchase helps with its user acquisition costs. If management can demonstrate capital allocation strategies that produce better results over several quarters, and the price of the stock remains near the same level, Skillz can be worth considering as an addition to your portfolio. 

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.

Stocks Mentioned

Skillz Inc. Stock Quote
Skillz Inc.
SKLZ
$0.98 (-2.80%) $0.03

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