These two companies have benefitted from a gaming boom due to COVID-19, but which of these newly public Wall Street favorites is a buy?
The gaming industry had a stellar year in 2020 with stay-at-home orders in place, creating a tailwind with increased spending and user engagement on gaming platforms. These trends look set to continue in 2021 and beyond as the world re-emerges from COVID-19. We take a look at two companies that have made it into one of famed investor Cathie Wood’s ETFs and ask which stock is a better buy?
Skillz: Bull vs Bear Arguments
Skillz (NYSE: SKLZ) is a mobile gaming platform that enables developers to use the platform to integrate competitions into their games and has a mission to “connect the world through competition”. The company has previously been listed on CNBC’s disruptor 50 list and went public via a SPAC merger in December 2020.
It was founded in 2012 by founder and CEO Andrew Paradise and is headquartered in San Francisco. Paradise is a serial entrepreneur and has a successful track record with three successful exits. Skillz appears to have a positive company culture with a 4.1 out of 5-star rating on Glassdoor, while Paradise has an 80% approval rating.
It hosts billions of e-sports tournaments and does not have to develop games, so it is in a unique position being neutral. In Q1 2021, revenue increased by 92% year-over-year (YoY) to $83.7 million. Its gross margins were a staggering 95%, and it has no debt with $613 million of cash. The company also raised guidance for the full fiscal year, which equates to 63% growth.
Skillz claims to generate 70% more engagement than the number one mobile game. It had 467 million paying monthly active users and average revenue per user of $10.35, increasing 81% and 86%, respectively. With Skillz estimating the mobile gaming market to be in the region of $86 billion, there is an immense market opportunity. In addition, expansion internationally into countries such as India will increase its total-addressable-market (TAM) significantly.
However, Skillz is unprofitable and reported a widening net loss of $53.6 million in Q1 compared to $15.5 million a year prior, which is concerning. Its sales and marketing, and user acquisition costs also increased in 2020, causing a decline in expected average lifetime value. These costs are likely to remain high as it attempts to attract new users.
Skillz also has a high customer concentration rate, with three customers accounting for 76% of revenue. If it were to lose one of these customers, the stock would be adversely affected.
Roblox: Bull vs Bear Arguments
Roblox (NYSE: RBLX) is a gaming platform with 42.1 million daily active users (DAU’s) in Q1 2021, an increase of 79% YoY. The 3D games on the platform are user-generated, and the platform is used in over 180 countries and is also known as the metaverse.
Roblox was founded in 2004 and went public through a direct listing in March 2021. It was co-founded by David Baszucki, who is the current CEO. Baszucki has an impressive 98% approval rating on Glassdoor, while the company has 4.4 out of 5 stars.
Roblox reported impressive revenue growth of 140% in Q1 to roughly $387 million. It monetizes its users through its in-game currency called ‘Robux’, which can be used to buy accessories, upgrade avatars, and more and can also be converted back to a regular currency, with Roblox earning a cut of every transaction. It continues to successfully monetize its users with an average booking per daily active user of $15.48, up 48% YoY.
The majority of the users on the platform are under the age of 13 and the hours engaged on the platform continued to increase by 98% YoY to 9 billion hours. This growth was driven primarily by international growth outside of North America. Roblox continues to make long-term investments in the business and recently partnered with Sony to engage users with concerts.
Before going public last year, Roblox was valued at $4 billion in a private funding round compared to its market cap of nearly $50 billion today. It also trades at 43x sales and will have to continue to execute flawlessly to maintain this valuation. The company is also unprofitable, reporting a net loss of $134.2 million in the quarter.
So, which stock is a better buy right now?
I would be cautious about investing in either stock right now. Both companies are unprofitable, and Skillz’s expenses are rising, and customer concentration is extremely high. However, if Roblox’s valuation were lower, it would be a better buy.
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