Shares of mobile gaming software company Skillz (SKLZ 2.39%) have declined about 90% in value from the all-time high they reached in 2021. When something like this happens, buy-and-hold investors should remind themselves that large drawdowns will happen at some point with all stocks. For example, don't forget that about 20 years ago, Amazon (AMZN -1.11%) stock fell more than 90% as well. Today it's a $1.6 trillion company, greatly rewarding shareholders who stomached the gut-wrenching drop.
One of Amazon's great decisions was starting its cloud business. Earlier this month, Skillz also announced the launch of Skillz Cloud. And it's a move that management believes could turbocharge its growth.
Amazon's cloud business
It's impossible to overstate the importance of Amazon Web Services (AWS) for Amazon. The company began breaking out AWS segment results in 2015, and the numbers have been nothing but extraordinary.
| Year | Operating income from AWS |
AWS percentage of Amazon's overall operating income |
|---|---|---|
| 2015 | $1.5 billion | 67% |
| 2016 | $3.1 billion | 74% |
| 2017 | $4.3 billion | 105%* |
| 2018 | $7.3 billion | 59% |
| 2019 | $9.2 billion | 63% |
| 2020 | $13.5 billion | 59% |
| 2021 | $18.5 billion | 74% |
Data source: Annual filings from Amazon. *Without AWS, Amazon would have reported an operating loss in 2017.
Put another way, from 2015 through 2021, Amazon reported $85 billion in cumulative operating income, including AWS. Without the cloud operation, it would have been less than $25 billion -- 67% less. Yes, AWS is a big deal and Amazon would be worth far less without it.
Vatsal Bhardwaj had a front row seat to this incredible growth engine for Amazon. For years, Bhardwaj was the General Manager and Head of Game Tech for AWS. And in October, Bhardwaj left Amazon to join Skillz as its Chief Product Officer.
Why Skillz Cloud could be important
Before we go any further, please understand Skillz Cloud is going to be fundamentally different from AWS. Whereas AWS provides databases, computing power, analytics, storage, and more, Skillz Cloud will simply make it easier for mobile gamers to try out games prior to downloading. Therefore, don't expect this to directly grow Skillz's operating income at an exponential rate and make it a trillion-dollar company like Amazon. That's highly unlikely.
Skillz Cloud was announced during the company's investor-day presentation on March 15. For context, game developers use Skillz's software developer kit to build their games, but they're available for download on Apple's App Store. Players can download the Skillz app for game discovery, but the app simply redirects you to download the game.
As CEO Andrew Paradise explained during the presentation, it's hard enough to ask gamers to download a game when they don't know if they'll even like it. But Paradise added that people who do download wind up deleting before even opening the game 20% of the time.
Image source: Getty Images.
Now, with Skillz Cloud, users will be able to discover games in the Skillz app with the option of playing instantly before installing. The advantage to this setup is people can try out a game before committing to a download. And since Skillz doesn't yet offer synchronous gaming (real-time, multiplayer), it doesn't have to worry about any lag time in game play for those playing from the cloud.
This could serve to boost adoption in two ways. First, existing Skillz users may become more engaged as they discover additional games they like. Second, and perhaps more importantly, this could serve to onboard new users since a pain point is removed.
The latter would be enormously beneficial for Skillz. Despite frequently pointing out how big the mobile gaming market is, Skillz only had 611,000 paying monthly active users (PMAU) as of the end of 2021. That was up 56% year over year. But generally speaking, given that it's starting from a very small user base, investors have worried Skillz's growth isn't good enough.
But don't rule out the importance of an increase in engagement with existing users. As of the fourth quarter, average revenue per paying user was $59, up only 3% year over year. A bigger boost in this paying user monetization could have an outsized effect on the company's top line.
A final thought
I don't believe the announcement of Skillz Cloud makes Skillz stock more investable today than it was before the announcement. I've previously written how I'm not a fan of how Skillz's management has reduced revenue guidance and failed to live up to profitability expectations.
However, I believe Skillz Cloud could be a catalyst for user growth, and that is an important part of a Skillz investing thesis. I would sincerely doubt this could be a market-beating investment without substantial user growth. Therefore, this is an area for investors to watch once Skillz Cloud officially launches to the general public.
