I’m taking a small position (3%) on Skillz.
Here are some financial numbers to begin with:
YoY Revenue growth in the last three earning calls: 89.87%, 89.87%, and 92.32%
Revenue 2019 27.0 27.0 31.2 34.7 2020 51.2 51.2 60.0
They have a very high gross margin: ~95%
What is Skillz?
They provide a platform for mobile games. Currently, there are two popular ways of making money in mobile games (if not selling a paid app): Ads or Purchase-in-App. The former destroys the experience and the latter makes the game less fun as one player can easily “cheat” by spending tons of $$.
Skillz has a different idea – competition. I remembered when I was a kid there’s a game call street fighter. The game is so fun in a way that two players played against each other and if you win, you stay in the game and the loser has to put another quarter to challenge you. It’s a similar (but a bit different concept). The Skillz invite both players to put a small “virtual coin” (which are essential $$). So basically two players both put 1 dollar on the table and the winner takes the money and Skillz takes a cut. Today they probably took a cut of 15%.
Note that they don’t make games. They provide a platform for two players to “duel” in a game and this makes the game so much fun. Of course, cheating can be a problem but generally speaking that a platform can create a system to forfeit all the “coins” you owned if you cheat. Also, if the amount for a duel is nominal, it makes a lot of fun. I can recall why I played street fighter all day long as I enjoy winning when the other player needs to put a quarter into the machine. If I can collect 20c from a quarter, I will even play longer I guess
I’m taking a position because of the revenue growth and the high-profit margin. They seem to be the only platform that powers this business model so they have a moat as the first mover. Note that they allow you to convert virtual coins back to CASH. Building such a platform for the game developer requires another team and it makes sense to just use a service like Skillz (APIs/Services).
I think they find a niche market that if a game is based on “skills” not “probability,” in many states they are allowed to do so – otherwise, it’s a gamble. If you are worried about this, check their post:
Currently, they are worth only 10B and if they can continue 90%+ growth with a 95% margin, I am positive about their future.
So what’s the catch?
- Most of their games (customers) today are kinds of lame. Or at least, not super popular. It’s very difficult to create a mobile game that goes viral. Luckily they don’t need to build games themselves and as long as they can eventually find a super-popular game to partner with, their revenue will skyrocket.
- Company like EA Sports can certainly create a similar business model to compete with them.
- It’s hard to predict the growth of mobile gaming growth in general after the pandemic.
I took some small position so I will pay attention to them. If anyone is interested in digging deeper, please chime in your research.
This is their latest presentation: