The market for interactive 3D content, including video games and 3D entertainment, is growing rapidly. As a result of the COVID-19 pandemic, user engagement has increased on 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 total addressable mobile gaming 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’s compare two content creation companies, Skillz and Unity Software, and see what Wall Street analysts think about these stocks.
It is important to note here 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’s proprietary mobile gaming platform helps developers build franchises and allows players to compete with each other in their games. SKLZ’s source of income is a percentage of the entry fee for players in paid matches.
Yesterday, the company reported record second-quarter revenue of $89.5 million, up 52% year over year, which beat the consensus estimate of $88.2 million.
However, the company’s net loss per share increased to $0.21 per share, from a loss of $0.07 per share in the year-ago quarter. Analysts expected a loss of $0.10 per share.
Looking at the Q2 results, SKLZ has updated its revenue forecast for FY21 from “$375 million to $376 million for Skillz on a standalone basis, plus $13 million revenue contribution from the business combination with Aarki, resulting in combined revenue in 2021 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 “increase Skillz’s presence in the fast-growing mobile game 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 allows developers to create and host real-time, synchronous multiplayer games like Photon. (To see Skillz stock chart on TipRanks)
Following the Q2 results, RBC Capital analyst Brad Erickson assigned a Hold rating, but lowered the stock’s price target from $17 to $15 (up 23.6%).
Erickson warned: “CAC [customer acquisition cost] continues to go in the wrong direction as a percentage of sales and with MAUs [monthly active users] and paid users both down q/q [quarter-on-quarter], it is difficult to paint a picture of meaningful valuation of stocks unless CAC efficiency improves in the future.”
Skillz reported MAUs of 2.4 million in the second quarter, 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 the second quarter of this year.
Erickson pointed out that SKLZ spent $1.31 on customer engagement per incentive spend in the second quarter for every $1 of revenue generated. As a result of that payout, the company’s sales and marketing expenses totaled 122% of revenue in the second quarter, up from 121% in the first quarter, the analyst said.
According to Erickson, “This furthers the narrative that the company’s growth rate is strongly tied to this spending on user incentives, which are not yet showing efficiency gains and are likely to do little to dispel a key part of the bear case.”
As for the rest of the street, the consensus is that SKLZ is a moderate buy, based on 3 purchases and 2 held. The $20.90 average Skillz price target implies an upside potential of about 72.2% from current levels.
Unity software (YOU)
Unity Software’s platform offers a comprehensive portfolio of software solutions for developers to create and monetize 2D and 3D content for tablets, PCs, mobile phones and consoles.
The company generates revenue through monthly subscriptions for its real-time 2D and 3D interactive content development tools. Unity also earns revenue through revenue-sharing schemes and usage-based models, along with its monetization products, Unity advertising, and Unity IAP (in-app purchases). These products help developers expand their customer base and monetize their content.
Unity is expected to report its second quarter results on August 10. The company expects its non-GAAP operating loss in the second quarter to be between $30 million and $40 million as Unity continues to invest in its business.
Unity expects second quarter revenue to range from $240 million to $245 million. This forecast spans two months in which Apple’s IDFA went into effect and indicates year-over-year revenue growth of between 30% and 33%.
For FY21, Unity expects to take a hit of $30 million when it comes to its earnings. This has to do with Apple’s Identifier For Advertisers (IDFA), which came into effect in April this year. Apple’s IDFA went into effect with the launch of Apple’s iOS 14.5.
This development will prevent app developers from tracking a user’s IDFA if users choose not to share their privacy information while downloading an app from AAPL’s app store. (To see Unity Stock Chart on TipRanks)
Unity discussed the impact of IDFA in its Q1 results release and said: “We have been preparing for IDFA for the past two years. So far, the spend on our platform is strong, our contextual model (which does not rely on IDFA) performs well and customer feedback is strong. Early indications give us confidence that we are outperforming other players in the market.”
Despite the impact of Morgan Stanley analyst IDFA Matthew Cost began covering Unity late last month and reiterated a Hold rating with a $115 price target (5.4% up) for the stock. The analyst remained positive, noting, “We see game engines like unity as secular beneficiaries in the game industry, leading to 29% ’20-’24 growth in the creation solutions segment (~40% of the revenue).”
According to Cost, Unity has benefited from a shift “to third-party engines in the gaming industry, as the technology is now used by >50% of all games (including >60% on mobile).”
In addition, the analyst said, “As shown by our detailed comparison of leading engines, we see Unity’s ease of use, cross-platform flexibility and freemium pricing model as key strengths over peers.”
As for the rest of the street, the consensus is Unity Software is a strong buy, based on 6 purchases and 2 waiting lists. The average Unity Software price target of $122.57 implies an upside potential of about 12.3% from current levels.
While analysts are cautiously optimistic about Skillz, they are optimistic about Unity Software. Based on the upside potential over the next 12 months, Skillz appears to be a better buy.
Disclaimer: The information in this document is for informational purposes only. Nothing in this section should be construed as a solicitation to buy or sell securities.