Skillz (SKLZ -2.09%) is not your typical gaming company. Players on the Skillz platform have the opportunity to wager real money on the outcome of the games. Of course, tangible benefits make gameplay more exciting, but isn't that gambling?
Therein lies the uniqueness of Skillz. Because it ensures the games on its platform are based on skill and not on chance, it is not regulated as a gambling company. That can partly explain why CEO Andrew Paradise is so bullish on the company's prospects. Indeed, he thinks reaching 1 billion players is a realistic target.
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Skillz has a massive market opportunity
On its investor day, March 15, Paradise had this to say about the company's total addressable market:
There are 2.9 billion gamers worldwide today. And based on several surveys, we believe that 40% of gamers would like to compete for [prizes] in their favorite video game. That's over 1 billion competitive gamers and growing. This is what makes me most excited about the opportunity of Skillz. We're innovating in a massive consumer media market.
To put that 1 billion figure into context, Skillz has been around for 10 years, and as of Dec. 31, it had 3.7 million monthly active users. Of that total, 611,000 are paying monthly active users, meaning they deposited money and entered a real-money contest. Expanding from the current totals to 1 billion will take a herculean effort.
Skillz does not create the games on its platform. Instead, it outsources this task to third-party developers and promises them a percentage of their creations' revenue. This removes the risk and capital investment from Skillz and shifts it to developers, who must invest their time and resources creating a game while unsure of the benefits. As you might imagine, developers are not too excited about those prospects. And one of the hindrances of growth for Skillz has been a lack of fresh and exciting games.
Some investors have asked the company to take on game creation to ensure new content is created to attract gamers. In response, management argues its model is better built for long-run success. It points to an industry of 15 million game developers worldwide and the high costs of game development.
Don't let that fool you into thinking that Skillz is shy about investing money to spur growth. The company spends aggressively (over 100% of revenue) on sales and marketing to acquire gamers. The investments have led to massive losses on the bottom line and partly explain why the stock is down 61% in 2022.
The investor takeaway
While the gaming market might be massive, it is also competitive. Players have various choices from free ad-supported titles to popular hits from Electronic Arts like Madden NFL. Skillz has successfully attracted its first 600,000 paying monthly active users; the next phase of growth will be difficult. One key to unlocking it could be a strategy that frequently brings higher-quality games. Until then, investors may want to watch from the sidelines.
