A stock that loses half of its value in a short period of time definitely comes with some inherent risks attached. So, when you see two companies that have declined by 70% (or more), caution is advised. But the present circumstances in the broader market are not typical, and that means some of these steep dips might be long-term opportunities.
The Nasdaq-100 technology index has officially entered a bear market, having plunged 26% from its all-time high set in November 2021. Rising interest rates and economic uncertainty have led investors to rein in their appetite for risk, which affects the price they're willing to pay for high-flying growth stocks.
Skillz (SKLZ 5.03%) and Unity Software (U 2.51%) operate in the fast-growing gaming industry, and their stocks have fallen 76% and 71% year to date, respectively. Both companies have their headwinds, but here's why they're worth considering for the long term.
The case for Skillz
The gaming market was worth a shade over $180 billion last year, and the mobile segment continues to lead the way. At $93 billion, mobile represented over 50% of the sector's total value and it was the only platform that generated growth, with console and PC gaming losing ground. That's why Skillz is an enticing opportunity; its business is built upon helping mobile game developers monetize their creations.
Skillz estimates that 98% of developers never achieve financial success, so the company offers a platform where users can play games to stake, and win, real cash. Both the developer and Skillz take a slice of the action, providing a whole new way for creators to generate revenue. That means even if a game never attains mainstream adoption, there's still an avenue to make some money.
Over 30 million players are now on the Skillz platform, winning over $100 million each month, collectively, according to the company. But since the top 2% of games are succeeding without Skillz, the platform is devoid of many popular titles. To change that, Skillz is hosting a developer competition in partnership with the NFL that could see a blockbuster football game join the fold once the winner is announced this year.
The momentum continues to build through a deal with UFC, which will allow developers on Skillz to use its intellectual property to create games. Skillz, UFC, and the developers stand to benefit financially if a game is successful on the platform.
The main reason Skillz stock has fallen so heavily is the company's failure to generate a profit. In fact, during the first quarter of 2022 it lost $148 million on just $93 million of revenue. It's completely unsustainable for a prolonged period of time, but the company has already begun to correct its course by optimizing its marketing spend (its largest single expense) to bring down net losses.
Buying Skillz stock therefore carries quite a bit of risk, but for investors who believe in the long-term staying power of the mobile gaming industry, it might be a bet worth taking.
The case for Unity Software
Unity Software plays a unique role in the gaming industry. It provides the tools developers need to build their creations, and its popularity has soared. In 2021, over 50% of all games on mobile, PC, and console were made using Unity Software, including 72% of the top 1,000 titles.
What makes Unity unique is its end-to-end approach. It's not just about development, but also operating the game once it's in the market. The company's Unity Pro platform includes a suite of analytics to track player behavior, allowing for rapid improvements as necessary. In addition, it provides plugins for advertising and in-app purchases so creators can easily monetize their games.
Unity's presence spans more than 190 countries, and its reach now extends far beyond just gaming: 3.9 billion people consumed content created with, or operated on, Unity every single month last year, from movies and animation to gambling applications to 3D modeling for industrial purposes. The company's operational diversity has driven strong financial results over the last few years, and with multi-trillion-dollar opportunities like the metaverse looming, it has a lot of potential.
But Unity did have a problematic first quarter of 2022. Its "operate" segment, which accounted for 57% of the company's total revenue for the quarter, experienced a growth deceleration to just 26% after customers found out Unity's Audience Pinpoint advertisement tool wasn't performing as accurately as expected due to an internal fault with the platform. Pinpoint has grown strongly since Apple made changes to its privacy rules, which made it harder for app developers to track users across the internet, meaning they can't gather as much data to deliver targeted ads.
Unity also ingested some bad data from a large customer which hindered its ability to train its advertising models. The good news is that both issues are temporary, and aren't expected to carry into 2023.
The bright spot in the quarter was Unity's "create" segment, which grew by 65% year over year, although it's much smaller with just $116 million in revenue compared to the operate segment's $184 million.
With Unity's stock losing 71% in 2022, much of which occurred after the recent earnings report, it could be a great opportunity to take a long-term position ahead of what the company says is one of the largest-ever transformations in tech: the move to real-time 3D experiences (like the metaverse).