Skillz (SKLZ)

I’d like to bring a company to this board that I haven’t seen discussed yet - Skillz (SKLZ).

Description: Skillz is a platform that allows mobile game players to compete for money (or Skillz currency). In other words, it provides IOS and Android gaming developers with the ability to monetize their games via competition, as opposed to relying on ads or in-app purchases. This includes head to head, bracket-like tournaments, or in live events. They have 58 pending patents on technology focused on detecting cheating and optimizing matchmaking for competitions.

Leadership: Andrew Paradise (CEO) co-founded the company with Casey Chafkin (CRO). As avid gamers themselves, they founded the company after being frustrated with the industry standard to monetize skill-based gaming. In several interviews, Paradise mentions the company’s 100-year vision to “create the competition layer for the internet.”

Competition: Skillz is the market leader in its niche. There are a couple of competitors that offer similar services (i.e. Unikrn), albeit they are much smaller private companies that have not reached anywhere near the scale that Skillz has. Paradise states that “Amazon and Sony have tried to compete with us but failed, along with approximately 30 venture-backed startups.” In 2017, Skillz was the fastest growing company in America according to Inc.

IPO Process: It’s worth noting that Skillz public through a SPAC. While I have been skeptical with SPACs, the team leading Skillz’s IPO (Flying Eagle Acquisition Corp) is the same team that led Draftking’s public debut last year. They set a 24-month lock-up period. Paradise mentioned that they chose the SPAC route due to “faster time to market with minimal cost difference, and also allowed us to choose our partner, who just completed the most successful SPAC, together with securing a strong group of PIPE investors including Wellington, Fidelity, etc.”

Business Metrics:
-62 minutes per user per day on its platform. This is higher than users spend on Tiktok, Facebook, and Youtube!
-70% more engagement generated on its platform than the #1 mobile game
-$1.6B GMV (total entry fees paid by users for contests hosted on Skillz)
-2B tournaments hosted per year
-14% take rate (constant for the past 2+ years)
-2.6M MAU (monthly active users)
-$6.30 ARPU (average revenue per user)
-4 month payback period

Financial Metrics (Q3, 2020):
-92% revenue growth YoY, reaching $60M (19th consecutive quarter of sequential revenue growth)
-92% gross profit growth, to $57M
-95% gross margins (maintained since last year)
-$43M loss for operations (driven by high Sales & Marketing spend)

Investment Thesis:
-Expanding gaming portfolio (currently 4-5 games make up the bulk of their revenue)
-90% of their revenue is US-based, but the international market is 4x larger. Skillz recently announced their intentions to enter the India market in 2021
-Getting into advertising to allow brands to sponsor tournaments
-Massive TAM (2.7B active gamers in the world and 10M developers)

Valuation:
This was not a straightforward calculation as a result of the SPAC so please feel free to challenge my assumptions
-Share price: $20.92
-Shares outstanding (fully diluted): 432M
-Net Debt / Cash: ($250M)
—>Results in an EV of $8.787M
-Expected FY20 revenue: $225M
-EV/S: 39x

Investor Presentation: https://www.sec.gov/Archives/edgar/data/1801661/000110465920…

Conclusion: While Skillz is not a traditional cloud high-grower, the metrics certainly qualify it as being worth a discussion in this board. It is a market leader in a rapidly growing segment, with a massive and expanding market. While the valuation is not as attractive as when I planned to bring this company to the board’s attention last week, it may still prove to be irrelevant given its lack of international penetration and additional monetization opportunities. I’m looking forward to hearing others’ thoughts!

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Thanks rmtzp for bringing SKLZ to the board. I opened a small starter position last week (given that the numbers look good and for the same reasons you outlined in your Thesis). However I do have concerns about the quality of the platform; from what I read the games offered and the platform in general is not so good; I invested a starter position on the basis that I think the Company should be able to improve these aspects going forward.
(I bought after the acquisition so I missed out in the gains one would have made by holding FEAC beforehand)

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Thanks for bringing this up!

This is my first post on the board, I’ve just been lurking & learning. I work in the videogames industry and hadn’t heard of this company yet. A few obvious obstacles in their path, imo:

  • games seem kind of… well, crap.

  • pay-to-play model is a hurdle: tons of competitions out there on better games requiring no entry fees; risk of being viewed as gambling in some international markets

  • most big IPs will not partner with them as publishers are realising the value in Esports and organising their own tournaments

  • audience size (people who watch other people play) is a big factor in securing brands to sponsor competitions. Big brands like to be attached to big games with latest graphics etc, or with huge player base, not so much this kind of mobile titles

The numbers you posted are surprisingly good, though, so curious to see how this evolves.

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Had not heard of them but Skillz looks very promising. I was able to track down their S-1 which was surprisingly hard to find because it was listed under the Flying Eagle company which is the SPAC bringing them public:

https://sec.report/Document/0001104659-20-132462/tm2034339-1…

Looks like it is the same group of individuals that brought DraftKings public as well, and they have done well.

I am surprised to see that demographics break down, and that 57% of the gamers are female? Also this is an interesting age distribution of the gamers:

18-25, 10%
26-35, 22%
36-45, 23%
46-55, 23%
56-65, 15%
66+, 15%

One more chart I had a question on was page 37 of the initial report posted. It shows 2.6M MAUs staying flat from Q1 to Q2 of 2020 but ARPU is going from $5.57 to $7.72? Gross Merchant Volume (GMV) is going from 301M to 413M as well. Any idea what’s driving GMV growth?

Lastly wondering about long term profitability. Loss of 14.9M in 2019 but 78.5M in 2020 (9 months). However that looks related most to a huge increase in Sales and Marketing spend which may not be a bad thing if the platform is sticking.

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There has certainly been chatter of concerns with the quality of their games. However, over time, the platform should attract players like Zynga and other game developers through their proven growth and popularity. The quality of games can obviously be improved over time as well. So that knock, to me, is short-sighted. Some folks I follow on Twitter have mentioned that Skillz has the potential to go beyond games and into fitness, ie Peloton competitions. Not sure about that but the CEO did say that he sees the company as “the competition layer of the internet”. Interesting vision. What stands out is the 95% gross margins and how they are projected to remain consistent going forward according to their investor deck. Pretty attractive numbers. And the time usage on the platform (as mentioned previously) is eye popping.

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For anyone on the board going long SKLZ, if the returs are as expected by the positive posts, it is small f foolish to buy the stock versus buying the warrant (SKLZ.WS) right now. The warrant is in the money and trading at a 20%+ discount to the intrinsic value. There are few scenarios where you do not come out ahead buying the warrant instead of the stock assuming equal number of each purchased.

I am a huge fan of this board and seek to be respectful of the prihibition on options discussion. I raise the warrant comment because a warrant trading at a significant discount to the intrinsic value both tells you that the buyers are not doing much work (not necessarily a problem, but tends to lead to short-term holders- also tends to indicate exuberance). For any long-term holder the warrant is a superior investment to the stock assuming equal numbers purchased (it will be more volatile to the upside, unclear if it will be more volatile to the downside due to the discount to intinsic value).

stock price: $20.92
warrant price: $8.10
strike price: $11.50
intrinsic value:$9.92
warrant term 4+ years remaining
call feature- company can call the warrant, but has to provide a 30 day window in which you can exercise.

Implied gain if stock price stays flat and warrant becomes exercisable is over 20%.

In an up scenario, you make more buying the warrant, in a down scenario, you lose less per share assuming equal count purchased. This all assumes that you hold until the warrant is exercisable, which is likely to be soon, and is under 1 year.

In the interest of assisting other group members, please consider the warrant instead of the stock if purchasing for a term any longer than a few week expected swing. Even then, if etting on an increase in value, the warrant is likely to be better.

-Archimedes

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I do have concerns about the quality of the platform; from what I read the games offered and the platform in general is not so good

I have heard similar claims; however I’m not particularly concerned for two reasons:
(1) Skillz’s top 3 games (Solitaire Cube, 21 Blitz and Blackout Bingo) account for 79% of its revenue. It makes sense that many amateur developers are using Skillz to try to monetize their games (which may not be that good). Yet the revenue derived from such games is negligible to Skillz.

(2) When Shopify and Etsy went public, there were also claims about the poor quality of the sellers items. Marketplaces will always run into these concerns; but their inherent network effects attract more quality. In the end, the tail-end outliers will, in theory, become irrelevant.

One more chart I had a question on was page 37 of the initial report posted. It shows 2.6M MAUs staying flat from Q1 to Q2 of 2020 but ARPU is going from $5.57 to $7.72? Gross Merchant Volume (GMV) is going from 301M to 413M as well. Any idea what’s driving GMV growth?

Lastly wondering about long term profitability. Loss of 14.9M in 2019 but 78.5M in 2020 (9 months). However that looks related most to a huge increase in Sales and Marketing spend which may not be a bad thing if the platform is sticking.

On GMV, I believe this might relate to the proportion of users that are monetized. They mention that their “paying MAUs” in 2019 was 10%, which rose to 12% in the first 9 months of 2020. So, it is possible that they are continuing to increase the “paying MAUs” throughout 2020. As such, GMV would also increase.

On long term profitability, it looks like they are seriously ramping up S&M expense. They increased S&M by 121% from 2019 to 2020 so I agree with your suggestion.

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“I am surprised to see that demographics break down, and that 57% of the gamers are female? Also this is an interesting age distribution of the gamers:

18-25, 10%
26-35, 22%
36-45, 23%
46-55, 23%
56-65, 15%
66+, 15% ”

Thanks for sharing this, I was looking for this information yesterday, I guess this could partially answer the quality questions, a lot of folks using this as online casino, they are addictive to the gambling part of it , may not be too concerned about the quality of the game if you compare to professional quality games, if you look at the games from casino, they are casual and easy to play .

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This is under appreciated by this board like roku for example was two years ago. Doesn’t matter if the games so far are kindve crappy. This is a platform to play games for money and will only add better games and even partner with the likes of peloton in the years to come. This could easily be a 100 billion company and I took a 12% position. Save this post next to mine on lvgo and roku from the past.

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I too have a position, currently only 5% of portfolio and own when it was FEAC before SPAC merger. It is talked about multiple times on Pounding the Table podcasts and recent Q#'s included a 95% gross margin.

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I would like to share this with our board , this is really a good piece in explaining Skillz’s business model
https://www.masterthemeta.com/business-breakdowns/a-look-und…

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I am trying to understand the bear case for SKLZ, and provide the following comments and questions to open a discussion:

I have taken a closer look at the latest quarterly (Q3) report from SKLZ. I’m not sure if I am reading it correctly but the MAU does not seem to have increased at all between January and September. I understand that MAU in Jan was 2.6m and the MAU in Sept was 2.7m. Can anyone explain why there is there practically no growth in MAU between Jan and Sept? (I would consider this lack of increase of MAU a red flag)

Also can anyone tell me how to determine Q/Q revenue growth? I read somewhere that revenue only increased 1.5% Q/Q for Q3, but I could not find Q2 revenue anywhere so I could not verify this myself.

A potential risk I see is SKLZ getting banned on iOS. Apple does not take a cut so there are little barriers for Apple to ban SKLZ. How high is the risk of something like that happening?

Sony and Amazon tried to replicate what SKLZ are doing and failed - but I could not find any detail on exactly why they failed. Does anybody have any insights on this? Could whatever caused Sony and Amazon to fail, also be an obstacle for SKLZ?

Any other arguments for the bear case?

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I have taken a closer look at the latest quarterly (Q3) report from SKLZ. I’m not sure if I am reading it correctly but the MAU does not seem to have increased at all between January and September. I understand that MAU in Jan was 2.6m and the MAU in Sept was 2.7m. Can anyone explain why there is there practically no growth in MAU between Jan and Sept? (I would consider this lack of increase of MAU a red flag)

The way they report MAU is confusing. I also don’t understand why “at the three months ended Sept 30” MAUs was 2.7m but “at the nine months ended Sept 30” MAUs was 2.6m. I’m not particularly sure that that means they had 2.6m in January per say. What we do know is that in their S1, they indicate that they had 1.5m MAUs in Sept 2019, which implies that they grew MAUs by ~80% YoY.

Also can anyone tell me how to determine Q/Q revenue growth? I read somewhere that revenue only increased 1.5% Q/Q for Q3, but I could not find Q2 revenue anywhere so I could not verify this myself.

QoQ revenue growth rate does indeed seem to be light. They implied $59m in Q2 on their investor presentation (https://www.sec.gov/Archives/edgar/data/1801661/000110465920…). It does seem strange that they grew 34% QoQ from Q1 to Q2 and then only 1.5% from Q2 to Q3. I think we’ll have to wait until next quarter to get a better picture of their QoQ growth rate as they only have one public quarter behind them. There could have been a change in how they compute these as a public company.

A potential risk I see is SKLZ getting banned on iOS. Apple does not take a cut so there are little barriers for Apple to ban SKLZ. How high is the risk of something like that happening?
Sony and Amazon tried to replicate what SKLZ are doing and failed - but I could not find any detail on exactly why they failed. Does anybody have any insights on this? Could whatever caused Sony and Amazon to fail, also be an obstacle for SKLZ?

I am sorry, but I wasn’t able to find enough information to address these questions.

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There is no threat of a ban on IOS. It’s about 30% Apple’s cut that they take on in-app purchases. Currently for Skillz games they don’t take anything (an exception in IOS general conditions). The risk is that Apple will start taking such a fee in the future. The counter argument here is that Sklz is too small at the moment for Apple to pay attention. Obviously, this could and most likely will change at some point in the future and this will negatively impact developers’s revenue as well as Sklz.

Another risk here is legalization in the US states of chance based games betting vs skills based games betting. Sklz monetizing the latter one as skills based betting is allowed in many states. If states will start to legalize chance game betting in order to get more revenues in these hard times it will draw existing and potential users from skill based betting - effectively Sklz niche. Counter argument here is that Sklz would diversify into chance betting once it’s legalized.

Overall, the main negative in the investment thesis is the stagnation of main numbers - MAU, GMV and revenues in last few quarters. On the other hand, there is a management forecast for GMV, topline and other main metrics for 20-22. These are expected to grow around 80% for full year 2020, 60% in 2021 and 50s in 2022. Contribution margin should be also improving. Ebitda should become positive in 2022.

So, I am not sure if we should rely on management expectations or become cautious due to anemic growth in last quarters?

Best,
V

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rmtzp,

Your write up and the company’s presentation of the numbers are totally compelling. But the games they’re monetizing all look like Candy Crush to me. Bingo, Solitaire, etc. How are these even skill games?

I sold half of my 1.8% position so it’s now a sub-1% dalliance and won’t really bother me too much if it gets killed. I might keep a little just to remind myself to watch closely next time they report numbers. But I am really hoping someone understands this more than I do, and/or can point me to articles or interviews or something that makes this more clear. I’m not saying Skillz isn’t a legitimate business…it just doesn’t seem like a very exciting one if this type of game is all there is. Maybe they can make some money, but I’m skeptical that they’re really becoming the “competition layer of the internet.”

Thanks in advance for any insight (rmtzp or others).

Bear

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Bear, My experience with Skills has been positive, I have been playing Pool Payday for a couple of weeks now, it is pretty cool, I have earned a skills flashlight and real cash 5$ in just a couple of weeks. Not huge but there are bigger prizes if you earn tickets like real money or even an air fryer. I could see how it could catch on actually earning real things from playing games. I have played head to head and it is fun, have not put my own real money into the games yet, but the holiday games and tournaments were fun. I have downloaded another game although have not played it yet, just stuck on the pool for now. I am looking at it more as an investment now that I have been playing. The also sent me a message there was a large donation to charity form the holidays from my participation in the games.

Thanks,
RDF

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Hi Fools,

SKLZ is the feature “Stock From Scratch” at 12 EST ON MOTLEY Fool Live.

Cheers,

mpfd

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The games they’re monetizing all look like Candy Crush to me. Bingo, Solitaire, etc. How are these even skill games?

They become skill games through competition - for example, two players enter a $5 bet for a Solitaire game. Skillz matches them, and they are giving the same deck of cards in the same order. The one who finishes first, wins. Example: https://www.youtube.com/watch?v=FENku6Aj4us&t=47s

I am really hoping someone understands this more than I do, and/or can point me to articles or interviews or something that makes this more clear.

Wells Fargo TMT Summit: https://attendesource.com/profile/web/index.cfm?PKwebID=0x78…

UBS Fireside Chat: https://event.webcasts.com/viewer/event.jsp?ei=1402792&t…

Jeffries Gaming Conference: https://wsw.com/webcast/jeff149/skill/2016231

List of patents: https://patents.justia.com/assignee/skillz-inc

Useful Twitter thread: https://twitter.com/GetBenchmarkCo/status/134362487183056487…

The also sent me a message there was a large donation to charity form the holidays from my participation in the games.

It looks like they are aware of their poor perception of being in the gambling business. They’ve also hosted several tournaments where they’ve donated all of their proceeds, such as: https://extralife.childrensmiraclenetworkhospitals.org/skill…

Disclaimer: While I’m happy that Bear & others have found this post useful, I too consider myself to be in the early stages of learning about the company. I’m trying to answer as many questions as I can, but there are many things I’m still trying to figure out, and a few flags.

(1) Net loss was ($43m) in Q3 compared to ($5m) last year. S&M is growing faster than revenue and MAUs
(2) Some of their marketing reinforces my discomfort of investing in a gambling business https://www.youtube.com/watch?v=evRTLde13hU&t=97s
(3) Questions regarding their QoQ growth rate per MoneySpin’s comment
(4) Any threat to their take rate from a change in App Store rules

That being said, the business model is certainly intriguing. Its hypergrowth, combined with 95% GMs + 4mo. payback + 3 year LTV in the early stages of monetization and international expansion, is worth paying attention to.

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I have a small position in Skillz via the SPAC.

This link to an article in Forbes last February gives a good overview.

https://www.forbes.com/sites/peggyannesalz/2020/02/03/skillz…

Thanks for all of the above research and notes. I’ve opened up a small starter position to see how we go.

I love the picks and shovel’s model, like a Shopify and Stripe rolled into one for mobile gaming.

I watched quite a few youtube videos of the CEO/founder Andrew Paradise and I think he has something about him.

I think this stock could be one to watch in 2021.

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