Skillz remains aggressive: spends 112% of its revenue on sales and marketing in the third quarter
Skillz (NYSE: SKLZ) is an exciting games company. Unlike many of its peers, the company offers its players the ability to bet on games played against each other. This inherently makes games more competitive and has the potential to attract serious users who might be willing to spend more money on their game.
The company announced its third quarter results on November 3 and is spending aggressively to spread the word and convince gamers to try its games. Overall, Skillz spent 112% of its revenue on sales and marketing in the quarter. Let’s take a closer look.
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Skillz continues to pedal to the end in the third trimester
Revenue reached $ 102 million in the third quarter, up 70% year-over-year. This feat would have been more impressive for investors if the company hadn’t spent so much on marketing.
In that same quarter, Skillz reported nearly $ 115 million in sales and marketing expenses. In addition, aggressive spending on this item is nothing new. The company has adopted this strategy throughout the year, and since the start of the year, Skillz has reported $ 310 million in selling and marketing costs on revenue of just $ 275 million.
The imbalance is not sustainable, and combined with its rich valuation, explains why the the market did not like the Skillz share in 2021. Actions of video game platform fell 9% the day after the results were announced, adding to what is now a 75% drop from its all-time high just a few months ago. Investors have clearly lost patience while waiting for Skillz to lower its acquisition costs.
Skillz adds players in Q3
On the bright side, Skillz has shown promising results in other parts of its quarterly report. Monthly Active Paid Users (PMAU) increased to 509,000 from 463,000 in the second quarter. This is a reversal of the slight quarter-over-quarter decline reported in August, which made me concerned this key user metric would continue to trend down as economies progressed in their efforts to reopen.
The launch of a new hit title has also helped drive user growth. Popular franchise Big dollar hunter became available on its platform during the third quarter and helped drive user acquisition. The game’s success in attracting players could give management a new avenue for allocating capital.
Remember that Skillz does not develop its own games. Instead, it encourages developers to create games for its platform by incentivizing them with a percentage of the revenue generated by each title. Therefore, Skillz can get a better ROI if it spends more on developer incentives. A successful headline can create a buzz and word of mouth that attracts players faster than the business sees on existing marketing channels.
All in all, the company has a great opportunity ahead of it with the long term growth of the gaming industry, but it needs to find a more efficient path to reach a wider audience.
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