Once in a while, a new business model announces its arrival in a way that cannot be ignored. Accordingly, Jefferies analyst Andrew Uerkwitz thinks Skillz (SKLZ) has the potential to be a major disruptor in the mobile gaming universe.
“In social gaming it started with Farmville. Candy Crush came along and showed that gamers came in sorts of stripes and flavors. Supercell built a mobile empire of competitive battlers,” the 5-star analyst said. “We believe Skillz is next in line.”
There is a lot to like about the company and its approach to forge ahead in the huge market it operates within.
Uerkwitz believes the company’s focus on competition, leader boards, and special events is an excellent way to monetize users, giving SKLZ a TAM (total addressable market) of more than 1 billion mobile gamers.
What’s more, the company’s conversion metrics stand out in a segment where retaining high engagement levels is notoriously difficult. Skillz has figured out that gamers are willing to fork out money to join in the “thrill of competition.”
The data bears this out. After downloading a mobile game, more than 50% will never even open it. Half of those who do, won’t ever do so again. A month later, the percentages of those left playing “are typically in the single digits.” And for those paying for games, the rates are worse – usually in the 2-3% range.
Skillz’ conversion rate, on the other hand, is excellent – and only improving. In 2020, player engagement reached new heights. The company boasted average MAUs (monthly active users) of 2.6 million, of which 324,000 were paying MAUs, representing a payer conversion ratio of 12.6%. The figure peaked in 4Q20, climbing to 16.3% of paying MAUs in the quarter.
“These are some of the highest payer conversion rates we have seen on mobile,” Uerkwitz said. “We see Skillz’s conversion metrics as evidence that its unique competition model is sound, and importantly scalable as it spends to bring new players into the top of the funnel.”
However, getting to scale is an issue the company is still working on, and could take a while. Therefore, despite the opportunity and SKLZ’ unique value proposition, its valuation keeps Uerkwitz on the sidelines.
Accordingly, Uerkwitz rates SKLZ a Hold along with a $17 price target. The implication for investors? Downside of 9% from current levels. (To watch Uerkwitz’ track record, click here)
In contrast, going by the Street’s overall average price target, the valuation issue is certainly not a concern. The shares are expected to add ~56% over the coming months, given the figure clocks in at $29. Rating wise, opinions are evenly split, ultimately tilting in the bulls’ favor; based on 3 Buys and Holds, each, the stock has a Moderate Buy consensus rating. (See SKLZ stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
