Skillz Can Pay The Bills With Its High Growth

Feb. 07, 2021 5:49 PM ETSkillz Inc. (SKLZ)35 Comments
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  • Mobile gaming platform Skillz is a disruptive company with incredible gross margins and high growth.
  • The company is trading at a premium to its peers and has important risk factors that need to be monitored.
  • Despite the valuation and risk, we believe it will reward the shareholders who can stomach the volatility.
  • Skillz is a founder-led company. The co-founders own a large amount of shares and had previous success with another startup company a decade ago.

As most are already aware, Skillz Inc. (NYSE:SKLZ) is a mobile gaming platform that provides app developers with an audience and an opportunity to monetize their games. However, unlike other platforms, Skillz does not rely on strategies such as "pay to win" or advertisements to monetize their users. Instead, they allow users to make bets on contests and take a 14% cut of the entry fees with the game developer taking the rest.

Skillz is able to generate very strong gross margins as a result of not having to actually develop the games itself. This has allowed the company to aggressively reinvest in marketing in order to grow its revenue. Although not currently profitable, its structure allows it to have very high profit and cash flow potential.

Industry Overview and Positioning

Skillz is a fast-growing company in a fast-growing industry. The mobile gaming industry has grown at a CAGR of 20% from 2014-2019. According to their investor presentation (which is dated September 1st, 2020), the mobile gaming market is $68 billion. However, a more recent industry report estimated that it might be $76.7 billion by the end of 2020. Either way, the industry has grown larger than that of movies and music. It is estimated that there are 2.6 billion mobile gamers of which 38% will pay for games.

rise of mobile gamingSource

As you can see from this picture, mobile gaming has been the fastest-growing subcategory of the whole gaming industry with the PC and console subcategories actually declining. Mobile has become so important that gaming companies are focusing on developing platform-agnostic subscription services that can penetrate mobile.

An interesting industry trend is that the cost to acquire a player dropped significantly to $1.47, which is a 66% decline from 2019. However, the cost to acquire a paying user has increased 24% to $43.88. This has resulted in developers shifting

This article was written by

StockBros Research profile picture
Two bros that talk about stocks, mainly GARP (growth at a reasonable price) stocks, but we look for opportunities everywhere. We don't have a specified time horizon. We invest in a stock for as long as our thesis holds true, and get out when the facts change. In addition, we've developed market-beating algorithms with python that help us find attractive investment opportunities within our own portfolios.Website: www.stockbrosresearch.comTwitter: @StockBrosTrades

Disclosure: I am/we are long SKLZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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