Can Skillz accelerate growth with this Amazon-like move?
Shares of a mobile game software company Skill (SKLZ -1.00% ) have fallen about 90% in value from the peak they hit in 2021. When something like this happens, buy-and-hold investors need to remember that significant declines will occur at some point with all actions. For example, remember that about 20 years ago, Amazon ( AMZN 0.34% ) the stock also fell more than 90%. Today is $1.6 trillion company, greatly rewarding the shareholders who endured the heartbreaking fall.
One of Amazon’s big decisions was to start its cloud business. Earlier this month, Skillz also announced the launch of Skillz Cloud. And it’s a move that management says could accelerate its growth.
Amazon’s cloud business
It’s impossible to overstate the importance of Amazon Web Services (AWS) to Amazon. The company started reporting AWS segment results in 2015, and the numbers have been nothing but extraordinary.
|AWS Percentage of Amazon
overall operating result
In other words, from 2015 to 2021, Amazon reported cumulative operating income of $85 billion, including AWS. Without the cloud operation, it would have been less than $25 billion, or 67% less. Yes, AWS is a big deal and Amazon would be worth much less without it.
Vatsal Bhardwaj was at the forefront of this incredible engine of growth for Amazon. For years, Bhardwaj served as General Manager and Head of Game Tech for AWS. And in October, Bhardwaj left Amazon to join Skillz as Chief Product Officer.
Why Skillz Cloud could be important
Before going any further, please understand that Skillz Cloud is going to be basically different from AWS. While AWS provides databases, computing power, analytics, storage, and more, Skillz Cloud will simply make it easier for mobile gamers to try games before downloading them. Therefore, don’t expect this to directly increase Skillz’s operating profit at an exponential rate and make it a trillion dollar company like Amazon. It is highly unlikely.
Skillz Cloud was announced during the company’s investor presentation on March 15. For context, game developers use Skillz’s SDK to build their games, but it’s available for download at Applefrom the App Store. Players can download the Skillz app to experience the game, but the app just redirects you to download the game.
As CEO Andrew Paradise explained during the presentation, it’s hard enough to ask gamers to download a game when they don’t even know if they’re going to like it. But Paradise added that people who do download liquidation deletion even before opening the game 20% of the time.
Now, with Skillz Cloud, users will be able to experience games within the Skillz app with the ability to play instantly before installation. The benefit of this setup is that users can try out a game before committing to a download. And since Skillz doesn’t yet offer synchronous play (real-time, multiplayer), it doesn’t have to worry about in-game latency for those playing from the cloud.
This could serve to drive adoption in two ways. First, existing Skillz users can become more engaged as they discover additional games they like. Second, and perhaps more importantly, it could serve to onboard new users since a pain point is removed.
The latter would be extremely beneficial for Skillz. While he frequently points out the sheer size of the mobile gaming market, Skillz had just 611,000 paying monthly active users (PMAUs) at the end of 2021. This was up 56% year-over-year. But generally speaking, given that it’s starting from a very small user base, investors fear that Skillz’s growth won’t be enough.
But don’t rule out the importance of increased engagement with existing users. In the fourth quarter, average revenue per paid user was $59, up just 3% year over year. A greater increase in this monetization of paying users could have an outsized effect on the company’s revenue.
One last thought
I don’t believe the Skillz Cloud announcement makes Skillz stock any more investable today than it was before the announcement. I’ve written before that I’m not a fan of how Skillz management cut revenue forecasts and fell short of profitability expectations.
However, I think Skillz Cloud could be a catalyst for user growth, and that’s an important part of a Skillz investment thesis. I would sincerely doubt it could be an investment that outperforms the market without substantial user growth. Therefore, this is an area for investors to watch once Skillz Cloud officially launches to the general public.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.