Unity software (NYSE: U) and Skillz (NYSE: SKLZ) both simplify video game development. Unity’s game engine is used to develop more than half of the world’s PC, console and mobile games. Unity provides all the tools needed to develop a game and launch it on multiple platforms, as well as tools to embed ads, process in-app purchases, host multiplayer games, and analyze player data.
Skillz’s platform hosts multiplayer games and tournaments for mobile games. By adding a few lines of code, developers can incorporate multiplayer functionality into their games without building them from scratch. Skillz also provides tools for payment processing and data analysis.
Image source: Getty Images.
Unity and Skillz both went public last year, but the former generated much larger payouts than the latter. Unity went public at $ 52 last September and its stock is now trading in the middle of $ 120. Skillz went public by merging with a SPAC (Special Purpose Acquisition Company) last December. It started trading at $ 17.89 on day one, but is now only worth around $ 11 per share.
Let’s take a look at why Unity outperformed Skillz by such a wide margin, and whether or not it will remain the top stock in the long run.
How fast are Unity and Skillz growing?
Unity is bigger than Skillz, but Skillz is growing at a faster rate. Unity’s revenue grew 43% to $ 772 million in 2020, and it forecasts another 35% to 37% growth this year.
Skillz’s revenue grew 92% to $ 230 million in 2020, and it expects 69% growth this year. Excluding his plan to buy out the advertising technology company Aarki, he anticipates self-sustaining growth of 63%.
Neither company is yet profitable on GAAP or non-GAAP metrics, but Unity’s bottom line growth looks healthier. Unity’s non-GAAP net loss has fallen from $ 113 million in 2019 to $ 66 million in 2020, and analysts predict another, narrower loss this year. Skillz’s adjusted EBITDA loss fell from $ 23 million in 2019 to $ 66 million in 2020, and analysts expect an even larger loss this year.
Unity shares are trading at 32 times last year’s sales, while Skillz shares appear cheaper at 12 times sales. However, Unity arguably deserves to trade at a higher valuation than Skillz because it has a bigger and more diversified business, more stable revenue growth and less loss.
Unity’s strengths highlight Skillz’s weaknesses
Unity serves many large video game publishers, but none of them accounts for more than 10% of its revenue. In the second quarter of 2021, 888 of its customers generated more than $ 100,000 in revenue in the past 12 months, up from 716 a year ago.
Image source: Getty images.
Skillz, on the other hand, made 87% of its revenue last year with just two video game publishers: Tether and Big Run. Three games – Tether’s Lonely Cube and 21 Blitz, and Big Run’s Blackout Bingo – brought most of this income. Skillz still generated 82% of its turnover with these two studios in the first half of 2021.
This concentration of customers makes Skillz’s business much more fragile than Unity’s. Skillz’s total monthly active users also fell 4% year-on-year to 2.5 million in the first half of 2021, suggesting its top three games are losing their luster. Skillz offset this drop by increasing its average revenue per user (ARPU) by 74% – but it could be in trouble if its ARPU growth stagnates.
Unity’s business model seems more sustainable than Skillz’s. Unity’s Create Solutions business, which hosts its main game engine, generates most of its revenue through subscription fees. Its Operate Solutions business – which provides in-app advertising, multiplayer functionality, analytics, and other tools – offers revenue-sharing and usage-based plans.
Skillz generates most of its revenue by maintaining a 50% reduction in an app’s revenue generated on its multiplayer platform. That’s significantly higher than the standard 30% discount charged by other mobile app stores and could prevent Skillz from expanding beyond its three main games.
A bright future versus a murky future
Unity’s pioneering advantage in the game engine market will ensure it grows alongside the global games market. It is already growing faster than the industry, thanks to its ability to sell additional services to its current clients, and it expects to become profitable on a non-GAAP basis by 2023.
Skillz’s future looks bleaker. It plans to expand beyond its three main games by entering new genres like battle royale and racing games, but many of these best games are already running on their own multiplayer platforms.
Skillz believes its upcoming takeover of Aarki will form the basis of an “integrated esports advertising platform” and expand its advertising ecosystem beyond its own platform and into other applications. However, Aarki could still face stiff competition from larger demand-side platforms like The commercial counter and other mobile ad networks.
The winner: Unity
All of this suggests that Unity is a better investment than Skillz. Skillz may still have room to grow, but its customer focus issues, flawed business model, and growing losses make it a more dangerous investment.
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Leo Sun has no position in the stocks mentioned. The Motley Fool owns stock and recommends Skillz Inc., The Trade Desk and Unity Software Inc. The Motley Fool has a disclosure policy.
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