Growth stocks partied hard on Wall Street in 2020. Now, they’re hungover. Many stocks that soared 100% or more last year, are down 20% or more this year. One such stock is that of mobile esports technology platform Skillz (NYSE:SKLZ). SKLZ stock was one of the hottest stocks of 2020, soaring from $10 to $40 in a matter of months. But, over the past two months, shares have lost more than half of their value, dropping from over $40 to below $20.
This plunge in Skillz stock is a golden buying opportunity for long-term investors.
The growth sector meltdown of February and March has been ruthless. SKLZ stock has been caught up in it. But, this meltdown cannot and will not last much longer. When it ends, high-quality growth stocks — many of which are now dramatically undervalued — will rebound, since they have all the earnings power.
Skillz falls in that category. This is a company that is pioneering a game-changing technology platform to revolutionize how mobile apps make money, and in the process, usher in a new era of mobile esports. It’s a company which will grow its revenues and profits by hundreds of percent over the next few years. As it does, SKLZ stock will soar.
To that end, near-term weakness in Skillz stock is a long-term opportunity.
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Here’s a deeper look.
SKLZ Stock Is a Long-Term Winner
The long-term bull thesis on SKLZ stock all boils down three things:
- Mobile gaming is the future.
- The mobile gaming market is currently undergoing a massive shift toward mobile esports.
- Skillz is optimally positioned to create the technology infrastructure supporting the mobile esports industry.
Very few would argue the first point. Everything’s going mobile these days. Gaming is no exception. About 2.6 billion folks across the globe play mobile games, mostly because they’re accessible, fast and offer great quick-hitter entertainment. These gamers also open their wallets for the games. Mobile games generated $77.2 billion worth of revenues in 2020, up 13.3% year-over-year. This trend of double-digit growth in the mobile gaming industry is expected to persist for the foreseeable future.
Now, onto point two, despite the huge popularity of and growth in mobile gaming, the economics underlying mobile games are broken. That is, most of these games are “free-to-play,” so they monetize through ads. But consumers don’t click ads on mobile games — and therefore, advertisers don’t spend much money on those ineffective ads. The result? Most mobile games have horrible unit economics, and are actually unprofitable.
The fix is a shift from mobile advertising to mobile esports. In the mobile esports model, mobile apps turn their games into real-money, skills-based competitions, where gamers pay an entry fee into a competition or tournament, and then win prize money if they win that competition.
Of course, because humans love to compete with each other and love the chance to make money (just ask the WallStreetBets crowd), gamers open up their wallets for these tournaments — and because the app developers take a commission off each entry fee, this pivot toward mobile esports dramatically improves the broken economics of mobile gaming.
Thus, over the next few years, you’ll see mobile gaming explode, mobile app ads disappear, and mobile esports become a ubiquity.
The Mobile Esports Technology Leader
For point three, Skillz is at the epicenter of this shift.
The company supplies the mission-critical, technology infrastructure that allows any old competitive, skills-based game, to turn into a mobile esports title with real-money competitions and tournaments.
So… let’s say I’m a mobile developer who made a skills-based card game back in 2015… but that card game has struggled to sell ads over the past few years. I could tap Skillz to integrate my gaming source code with the company’s tech platform to seamlessly turn my card game into a mobile esports platform with real-money wagers and prize tournaments.
Why would I do that?
Because Skillz has a proven track record of meaningfully improving mobile gaming economics. The average revenue per user of games built on the Skillz tech platform hovers above $6, versus less than $2 for ad-based games.
The competitive advantage here is Skillz’ anti-cheat algorithm — and it’s a very big and very durable advantage.
Cheating is unfortunately super common in mobile esports. Therefore, a strong anti-cheat algorithm is the most important piece of any mobile esports game. The strength of an anti-cheat algorithm is determined by the volume and granularity of real-time gaming data that informs it. And, because Skillz is the first mover in this space, the company has amassed the most robust gaming data lake — which the company has turned around to build the industry’s best anti-cheat algorithm.
With the industry’s best anti-cheat algorithm, Skillz is strategically positioned to dominate the mobile esports technology infrastructure market for the foreseeable future — and during that time, SKLZ stock should outperform.
Forget Yields, Focus on Fundamentals
Now, SKLZ stock has been killed over the past two months, mostly because of inflation fears knocking the wind out of growth stocks and the company pricing a public offering at $24 per share (well below the $30 stock price at the time the offering was announced).
But these are near-term headwinds. Inflation fears are grossly overstated and unnecessarily short-sighted. They will pass. Soon. And we will settle back into a sub-2% inflation environment, thanks to the ever-expanding deflationary influence of technology.
Meanwhile, the public offering may have been below market prices back in early March. But that’s no longer the case today. The SKLZ stock price today sits below $20.
So, investors would be wise to forget these near-term and overplayed headwinds. Instead, they should focus on the fundamentals. And the fundamentals underlying Skillz stock continue to improve.
Just look at the numbers from the company’s last earnings report.
Monthly active users rose 20% year-over-year. Average revenue per user rose 60%. Gross marketplace volume rose about 80%. Revenues rose 95%. Gross margins were stable at a jaw-dropping 95% (yes, 95% — Skillz provides software services through highly scalable technology infrastructure, and therefore, runs at insanely high gross margins). The guide came in strong, calling for about 60% revenue growth next year.
Importantly, Skillz is operationally doing everything right to ensure that this hypergrowth trajectory persists.
The company is aggressively expanding the reach of its synchronous gameplay ecosystem to enable new gaming genres, ranging from real-time strategy to fighting to racing to first person shooters. The company is also scoring big content deals — such as a multi-year partnership with the NFL and a big-time contract win with the popular arcade game Big Buck Hunter. Skillz is also looking to expand quickly into India, a market where mobile gaming is huge (137 million gamers) and growing rapidly (26% growth in gamers per year).
Thanks to these strategic moves, Skillz is optimally positioned to sustain enormous growth in 2021/22.
Alongside this sustained enormous growth, SKLZ stock will bounce back to its February highs — and then some.
Skillz Stock Is Undervalued
By my numbers, short-sighted fears have plunged SKLZ stock more than 50% below its fair value.
Thanks to the growing popularity of mobile esports and Skillz’ anti-cheat algorithm advantage in the space, I see Skillz continuing to grow its monthly active user base at a double-digit pace into 2030. Increased gamer engagement with prize-money competitions and tournaments should boost average revenue per user by about 5% per year. Revenue growth should exceed 15% for the next decade.
Gross margins will remain steady around 95%. The super-scalable business model will allow for meaningful operating leverage, and EBITDA margins have runway to 30% in time.
Plugging those assumptions into my valuation models, I calculate a fair 2021 price target for SKLZ stock of about $50.
So, I see SKLZ stock as having more than 100%-plus upside potential over the next 12 months.
Bottom Line on SKLZ Stock
The tech sector meltdown has created multiple golden buying opportunities. And Skillz is one such opportunity that ranks among my top “Digitainment” stocks to buy, but it’s far from my only pick.
The world’s entertainment services are being digitized at a pace that’s accelerating, as globalization and technological convenience converge to create a more tech-centric society.
My top hypergrowth stocks in this megatrend include companies from social media, advertising, streaming TV and iGaming.
Get my complete list of stocks to buy in Digitainment by subscribing to Innovation Investor today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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