The market for 3D interactive content, including video games and 3D entertainment, is expanding rapidly. Due to the COVID-19 pandemic, user engagement has risen across both 3D entertainment platforms and mobile gaming, as more users play 3D video games or indulge in 3D virtual experiences.
According to an RBC Capital report, the mobile gaming total addressable market (TAM) was worth $91 billion last year, representing more than half of the total global gaming market, which is worth $175 billion.
Using the TipRanks Stock Comparison tool, let us compare two content creation companies, Skillz and Unity Software, and see how Wall Street analysts feel about these stocks.
It is important here to note that Skillz lists its competitors as companies that provide users with other forms of discretionary entertainment besides mobile gaming, and that includes Unity Software.
Skillz (SKLZ)
Skillz’s proprietary mobile gaming platform helps developers to build franchises and enables players to compete with each other in their games. SKLZ’s source of revenue is a percentage of player entry fees in paid contests.
Yesterday, the company reported record revenues in Q2 of $89.5 million, a jump of 52% year-over-year, which beat the consensus estimate of $88.2 million.
However, the company’s net loss per share widened to $0.21 per share from a loss of $0.07 per share in the same quarter last year. Analysts were expecting a loss of $0.10 per share.
Looking at the Q2 results, SKLZ updated its revenue guidance for FY21 from “$375 million to $376 million for Skillz on a stand-alone basis, plus $13 million revenue contribution from the business combination with Aarki resulting in combined 2021 revenue of $389 million.”
Last month, the company announced the acquisition of Aarki in a $150 million cash and stock deal. The acquisition is expected to close in the third quarter of this year. Aarki is a demand-side platform (DSP) with a reach of 465 million monthly users.
According to the company, this acquisition is expected to “broaden Skillz’s footprint across the rapidly expanding mobile gaming industry by combining its competitive platform with Aarki’s advanced advertising capabilities.”
Earlier this month, SKLZ also invested $50 million for a minority stake in Exit Games. Exit Games enables developers to create and host real-time, synchronous multiplayer games such as Photon. (See Skillz stock chart on TipRanks)
Following the Q2 results, RBC Capital analyst Brad Erickson assigned a Hold rating but reduced the price target from $17 to $15 (23.6% upside) on the stock.
Erickson cautioned, “CAC [customer acquisition cost] continues going the wrong direction as a percentage of revenue and with MAU’s [monthly active users] and paid users both down q/q [quarter-on-quarter], it’s difficult to paint a picture towards meaningful stock appreciation unless CAC efficiency improves going forward.”
Skillz reported MAUs of 2.4 million in Q2, down 7.6% year-over-year. Average revenue per paying user (ARPPU) fell from $64.99 in the second quarter of last year to $64.36 in Q2 of this year.
Erickson pointed out that SKLZ spent $1.31 in customer engagement per incentive spend during Q2 for each $1 of revenue generated. Reflecting that payout, the company’s sales and marketing spend was 122% of revenue in Q2 versus 121% in Q1, according to the analyst.
According to Erickson, “This furthers a narrative that the business’s growth rate is heavily tied to this user incentive spend which is yet to show improving efficiency and likely does little to dispel a key part of the bear case.”
Turning to the rest of the Street, consensus is that SKLZ is a Moderate Buy, based on 3 Buys and 2 Holds. The average Skillz price target of $20.90 implies an approximately 72.2% upside potential to current levels.
Unity Software (U)
Unity Software’s platform provides a comprehensive portfolio of software solutions for developers to create and monetize 2D and 3D content for tablets, PCs, mobile phones, and consoles.
The content created through the Unity platform can be deployed on more than twenty platforms, including Microsoft Windows (MSFT), Apple’s (AAPL) Mac, Nintendo’s Switch, and Sony’s (SONY) PlayStation.
The company generates revenues through monthly subscriptions for its real-time 2D and 3D interactive content development tools. Unity also earns revenues through revenue sharing arrangements and usage-based models, along with its monetization products, Unity Ads, and Unity IAP (In-App-Purchases). These products help developers grow their end-user base and monetize their content.
Unity is expected to report Q2 results on August 10. The company anticipates non-GAAP operating loss to range between $30 million and $40 million in Q2, as Unity continues to invest in its business.
Unity has projected revenues to vary from $240 million to $245 million in Q2. This forecast includes two months when Apple’s IDFA came into effect and indicates year-over-year revenue growth between 30% to 33%.
For FY21, Unity expects to take a hit of $30 million when it comes to its revenues. This is related to Apple’s Identifier For Advertisers (IDFA), which came into effect in April this year. Apple’s IDFA came into force with the launch of Apple’s iOS 14.5.
This development will result in app developers being unable to track a user’s IDFA if users opt out of sharing their privacy details while downloading an app from AAPL’s app store. (See Unity stock chart on TipRanks)
Unity discussed the impact of the IDFA in its Q1 earnings release, saying, “We have been preparing for IDFA for the last two years. So far, spending on our platform is strong, our contextual model (which does not rely on IDFA) is performing well, and customer feedback is strong. Early indications give us confidence that we are performing better than other players in the market.”
Despite the impact of IDFA, Morgan Stanley analyst Matthew Cost initiated coverage of Unity late last month and reiterated a Hold rating with a price target of $115 (5.4% upside) on the stock. Maintaining a positive outlook, the analyst commented, “We see game engines like unity as secular beneficiaries in the gaming industry, leading to 29% ’20-’24 growth in the create solutions segment (~40% of revenue).”
According to Cost, Unity has benefitted from a shift “towards third party engines in the gaming industry, as its technology is now used by >50% of all games (including >60% on mobile).”
Moreover, the analyst said, “As shown in our detailed comparison of leading engines, we see Unity’s ease-of-use, cross platform flexibility, and freemium pricing model as key strengths vs. peers.”
Turning to the rest of the Street, consensus is that Unity Software is a Strong Buy, based on 6 Buys and 2 Holds. The average Unity Software price target of $122.57 implies an approximately 12.3% upside potential to current levels.
Bottom Line
While analysts are cautiously optimistic about Skillz, they are bullish about Unity Software. Based on the upside potential over the next 12 months, Skillz seems a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
