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Here’s why many are accumulating shares of Skillz Inc. for the long term

by Dissecting the Markets about a year ago in stocks
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The way they're approaching the growth in esports and mobile gaming is unique. Skillz is essentially competing in and dominating its blue ocean.

Here’s why many are accumulating shares of Skillz Inc. for the long term
Photo by Javier Martínez on Unsplash

Months ago, shares of Skillz Inc. fell more than 4% after confusion arose regarding the redemption of the company’s warrants. During that time, shares of Skillz were down by more than 50% from their all-time high in February as investors look to rotate out of tech stocks and into value stocks.

During that time, many on Money Twitter developed a huge appetite for Skillz shares. Since then, the stock fell even more due to other bad news and then later rebounded sharply.

When Skillz was surging, I didn't like the stock before I found it to be overvalued and lacked a margin of safety. After a sharp correction, I developed a huge appetite to buy the dip on the stock.

For those of you wondering what the bull thesis for Skillz is, here it is:

The Long Term Picture

There are three things that make Skillz a winner in the long run:

  1. The rise in mobile gaming
  2. Currently, the mobile gaming industry is shifting towards mobile esports
  3. Skillz has the technology infrastructure to support the mobile esports industry

In the past, mobile game developers would create apps that are free to download and the developers would monetize the game mainly through ads. These ads can be annoying and the conversion rates for them are horrendous. Because of this, many gaming apps are unprofitable.

With the mobile esports model, mobile apps turn into skill-based competitions. In these competitions, players pay an entry fee and the winner wins a cash prize. The app developer makes money by taking a commission of each person’s entry fee. This model helps app developers overcome the horrible economics of mobile game development and it incentivizes developers to make games that are popular and better.

Technology

Skillz provides tech infrastructure to mobile game developers that allow any skill-based game into a mobile esports title. Their technology can help revive many old, skill-based mobile games that are unprofitable and turn them into profitable mobile games.

And interestingly enough, Skillz was the first to move into this space. Because of this, they’ve been able to learn more about the mobile gaming ecosystem and have gathered a ton of data to make their software better. Thanks to the amount of data they’ve gathered, Skillz has been able to implement anti-cheat algorithms into their software so that the tournaments can be fairer and more fun.

No one wants to play tournaments where cheaters are present. It ruins the game!

Other fundamental strengths

There are many other things to like about Skillz. First, Skillz signed a multi-year agreement with the NFL as a major content deal. Also, Skillz is looking to expand into many popular genres like racing and first-person shooters. Those genres attract a lot of fans when it comes to esports. Skillz even signed a partnership agreement with one of the most iconic games, Big Buck Hunter. And finally, Skillz is looking to expand into many other countries, (especially India, where the mobile game industry is booming).

Because Skillz’s business model is highly scalable, the company has been able to achieve huge margins for its services. We’re talking about margins at 95%! Add on the massive revenue growth (company provided guidance of 60% YoY revenue growth), Skillz has the characteristics of a hyper-growth startup.

*When writing this, I used metrics used in prior quarter reports

Conclusion

Overall, Skillz is an attractive company. Despite the strong recovery, I still think that Skillz is trading at a great discount. The company has the characteristics of a startup that will have immense success in the future. Anyone looking to bet big on the esports industry should look into this company.

However, note that the company still hasn’t made a profit and is continuing to invest in its business to position itself for a brighter future. If you’re a long-term investor, take caution of Skillz’s financials and continue to remind yourself of the company’s long-term potential. The road to higher highs will be bumpy.

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About the author

Dissecting the Markets

My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.

*All views expressed in my articles are my own and should be considered opinionated

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