What’s a better watch right now: Skillz or Roblox
TThe gaming industry had a stellar year in 2020 with door-to-door orders in place, creating a tailwind with increased spending and user engagement on gaming platforms. These trends are expected to continue into 2021 and beyond, as the world re-emerges from COVID-19.
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We take a look at two companies that became one of famed investor Cathie Wood’s ETFs and ask which stock is better watch?
Skillz: bull versus bear arguments
Skillz (NYSE: SKLZ) is a mobile gaming platform that allows developers to use the platform to integrate competitions into their games and has a mission to “connect the world through competition”. The company was previously on CNBC’s 50 Disruptor List and went public through a PSPC 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 corporate culture with a 4.1 out of 5 star rating on Glassdoor, while Paradise has an 80% approval rating.
It hosts billions of esports tournaments and doesn’t have to develop games, so it’s in a unique position to be neutral. In the first quarter of 2021, revenue increased 92% year-on-year to $ 83.7 million. Its gross margins were 95%, and it has no debt with $ 613 million in cash. The company also raised its forecast for the full year, which equates to growth of 63%.
Skillz claims to generate 70% more engagement than the number one mobile game. It had 467 million monthly active paying users and an average revenue per user of $ 10.35, increasing by 81% and 86% respectively. With Skillz estimating the mobile gaming market at around $ 86 billion, there is a huge market opportunity. In addition, international expansion into countries such as India will dramatically increase its total addressable market (TAM).
However, Skillz is unprofitable and reported a growing net loss of $ 53.6 million in the first quarter, up from $ 15.5 million a year earlier, which is of concern. Its costs of selling, marketing and user acquisition also increased in 2020, leading to a decline in the average lifetime expected value. These costs are expected to remain high as it tries 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 negatively affected.
Roblox: bull versus bear arguments
Roblox (NYSE: RBLX) is a gaming platform with 42.1 million Daily Active Users (DAU) in the first quarter of 2021, an increase of 79% year-over-year. 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 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 first quarter revenue growth of 140% to around $ 387 million. It monetizes its users with its in-game currency called “Robux”, which can be used to purchase accessories, upgrade avatars, and more. It continues to successfully monetize its users with an average booking per daily active user of $ 15.48, up 48% year-over-year.
The majority of platform users are under the age of 13, and hours committed to the platform continued to increase 98% year-over-year to reach 9 billion hours. This growth is mainly driven by international growth outside North America. Roblox continues to make long term investments in the business and has recently partnered with Sony to engage users with gigs.
Before going public last year, Roblox was valued at $ 4 billion in a private round-table, up from a market cap of nearly $ 50 billion today. It is also trading at 43 times sales and will need to continue to perform flawlessly to maintain that valuation. The company is also unprofitable, reporting a net loss of $ 134.2 million in the quarter.
So which stock is a better watch right now?
I would be cautious on either stock at this time. Both companies are unprofitable, Skillz expenses are increasing, and customer concentration is extremely high. However, if Roblox’s valuation was lower, it would be a better buy.
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