Skillz (SKLZ 3.79%) is a unique gaming company in that it allows folks the opportunity to wager on games played. Of course, games are more interesting if you have the chance to win a prize. Significantly, the games it offers are based on skill. That is vital because if they were based on luck, Skillz would be regulated as a gambling company and face more onerous restrictions.
The company thrived at the pandemic onset, as folks spent a lot more time at home. Mobile games became a popular way to pass the time, and Skillz benefited from the trend. That said, the reversal of that trend has been painful, and the stock has been down 88% in the last year. Let's look closer at the company to determine if it's worth buying right now.
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Skillz needs to demonstrate more efficient marketing
The magnitude of benefit from the pandemic was dramatic. From Q4 2019 to Q1 2021, Skillz increased paying monthly active users from 167,000 to 467,000. Note that Skillz cannot yet generate revenue from advertising.
So, its only source of revenue is from players joining games with an entry fee. Skillz then takes a percentage of the payout. For instance, if four individuals enter a contest for $10 each, Skillz might take $5, the developer of the game another $5, and the tournament winner will get $30.
That's why increasing paying monthly active users and engagement between them is critical for Skillz's success. In that regard, you can understand why management is spending over 100% of revenue on sales and marketing to attract new players and increase engagement among existing ones.
Management is taking heat for the return on that investment. From Q1 2021 to Q3 2021, Skillz has increased paying monthly active users from 467,000 to 509,000. Management acknowledges there is plenty of room to lower acquisition costs and is implementing initiatives to make progress on that front.
For one, it is working to bring hit game titles to the platform. At the end of Q3, it officially launched Big Buck Hunter: Marksman, a popular title that reaches 20 million viewers per month through its arcades and online game network. Furthermore, it acquired an advertising platform, Aarki, which will help its marketing team improve efficiency. Finally, management said it intends to decrease engagement marketing as a percentage of revenue in 2022. Together, these initiatives can potentially address one of the main concerns the market has against Skillz, which is the high sales and marketing spending.
Is Skillz a buy right now?
The sell-off in its stock has Skillz trading at a price-to-sales of 4.8, the lowest in its brief history and down considerably from its peak of over 45. That seems like a reasonable price to pay for a company that has more than tripled revenue from $31 million in Q3 2019 to $102 million in Q3 2021.
Admittedly, the fact that it needs to spend over 100% of revenue on sales and marketing is a troubling figure. And there is no telling how far user engagement and revenue will fall off if management significantly reduces that spending. Therefore, prudent investors will want to see better returns from that spending before acquiring shares.
