Skillz Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

Skillz Inc. is a technology company that operates a mobile games platform, connecting gamers through competitive tournaments and real-money prizes.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Skillz operates a mobile e-sports platform, where mobile game developers and players can compete in tournaments. The company has two main sources of revenue: game revenues and bonus revenues.

Game revenues come from commissions, as the company takes a percentage from the entrance fee players pay to participate in tournaments and prizes.
Bonus revenues consist of money spent on marketing and advertising to incentivize engagement.

The underlying business model is the key driver for revenue and is a core feature of Skillz. Skillz does not develop games on its own. Instead, third-party game developers use the company’s platform and infrastructure to create multiplayer competitions. This allows the company to quickly scale the variety of the games. The model can be replicated easily by other companies. Skillz uses a pay-per-use pricing model with relatively low entry requirements, which further makes the business model easy to duplicate.

Skillz’s margins are relatively high due to a software-heavy, capital-light business model.

Moat Analysis: 1 / 5

Skillz’s moat rating is a 1 out of 5. Here’s why:

Low Barriers to Entry: The mobile gaming market has low barriers to entry. Developing a platform for mobile e-sports is not complex, and requires no extensive physical infrastructure. The competition with other e-sports platforms is fierce.
No Network Effects: Although Skillz benefits from the increase in users as it grows, its value doesn’t increase at a non-linear rate because of having more users on its platform, similar to the network effect that other technologies enjoy. Each tournament has a limited number of players and the network effect is limited and doesn’t grow with the business. There is no inherent advantage in using Skillz over a competitor with similar offerings.
Limited Switching Costs: The switching costs for players are virtually zero. Switching from a game in the Skillz platform to a similar game in a competing platform takes no investment, and doesn’t limit the user from having multiple accounts across multiple platforms.
No Intangible Assets: Although Skillz uses its brand to reach new users, their brand doesn’t hold enough influence to establish a moat around their business, as users will go where they think there is a higher prize or better experience. They have no defensible patents.
No Cost Advantages: Scale economies are not prominent in the mobile game platform space, and there are several competitors of considerable size.
Reliance on Marketing: SKLZ heavily relies on marketing and sales to sustain their revenue, which could signal a weak or non-existent moat. If a business can not achieve and sustain revenue from customers without marketing, they have a limited moat.

In conclusion, Skillz lacks a durable competitive advantage, which earns it a low rating for moat. Their revenue is heavily dependent on marketing and acquiring new customers.

Risks to the Moat and Business Resilience The identified risks are high and substantial, and pose great risks to the company’s growth and profitability, and therefore, make their moat extremely fragile.

Heavy Competition: There are many competitors with similar mobile gaming platforms and business models, which creates price competition. Many companies can attempt to start their own e-sports platform, which is a business that does not require huge infrastructure. Some companies will also be able to offer similar, if not better, gaming experiences.
Marketing Costs: To sustain growth, the company relies heavily on marketing and customer acquisition. However, competitors with strong financial backing can start a bidding war and drive up acquisition costs, making it difficult for Skillz to remain profitable.
Regulatory Issues: Regulations can put substantial limitations on their business model. The company might face additional laws or policies that might impede the growth of the company, or worse, make the current business model not profitable.
Technological Disruption: A new technology could alter the landscape of the mobile e-sports platforms, making current systems obsolete.
User Experience: In the context of games and entertainment, user experience is paramount. A superior game experience with lower costs would cause users to quickly jump ship, leaving Skillz with a lot of sunk costs in customer acquisition and promotions.

Financials Overview

Revenue Growth: Revenue growth has been volatile, showing significant fluctuations. In 2021, total revenue was $384 million, but sales have dropped significantly in the latest years. The company faces great challenges in sustaining its growth in the near future.
Margins: The gross margins are generally high (60%+) due to the lack of product costs for its software business model. However, due to high expenses for marketing and operations, the company faces huge operating losses.
Profitability: Skillz has consistently reported losses. Operating losses, even with relatively high gross margins, have severely impacted the profitability of the company, especially in 2022 when it lost more than $1.2 billion.
Capital Structure: The company’s use of debt has been relatively low. However, due to declining revenues and increasing losses, a capital increase through equity might be needed, which would significantly dilute the stock.
Cash Flows: Due to the high operating expenses, Skillz had negative operating cash flows of more than $300 million and $400 million in 2021 and 2022 respectively, making cash flow an important area for them to improve on. This trend of negative cash flows is expected to continue in the near future.
Cash Position: Despite these losses, the company has a decent cash reserve of $377 million, but with the current trends, their cash will decrease considerably in future years.
Recent Trends: In its latest earnings call, Skillz reported a drop in revenues by 52%, which clearly signals that there are high uncertainties in their future performance.

Understandability Rating: 3/5 The core business model of Skillz as an e-sports platform is not very complicated, so it is easy to conceptualize and understand. What makes this a complex business to analyze are their unique financial structures, and reliance on marketing, alongside the extremely competitive industry it operates in, making it difficult for even experienced investors to understand all of its intricacies and the probability of profitability. Hence, it earns a 3 out of 5 in the understandability rating.

Balance Sheet Health: 3/5 Skillz’s balance sheet health is a mixed bag. While the company does have some cash on its balance sheet and does not have a lot of debt (although has recently announced an offering of debt, which is indicative of its struggles to obtain revenue and sustain itself), it also has persistent losses and reduced equity. Also, the company carries intangible assets of roughly 350 million USD on its books, which represents almost 40% of its assets. If these intangibles are impaired, then their liabilities could exceed their assets, and put the company in a delicate financial position. For all the above reasons, Skillz gets a 3 out of 5 for the balance sheet rating.