The video game industry continues to grow—owing to highly engaging content and continued innovations—despite peoples’ return to outdoor activities with the reopening of the economy. But we think Skillz (SKLZ) looks overvalued at its current price level. Therefore, investors should instead bet on shares of fundamentally sound video game companies Electronic Arts (EA), Playtika (PLTK), and DoubleDown Interactive (DDI) to cash in on the industry tailwinds. Let’s discuss.San Francisco-based Skillz Inc. (SKLZ) enables game developers to monetize their content through fun and fair multiplayer competition. Its revenue increased 70.2% year-over-year to $102.07 million in its third quarter (ended September 30, 2021), but its total costs and expenses increased 107.5% year-over-year to $183.72 million. Furthermore, its loss from operations came in at $81.64 million, versus $28.56 million in the year-ago period. Along with the company’s weak financials, its 0.67% trailing-12-month CAPEX/Sales ratio is lower than the 3.82% industry average. In addition, its trailing-12-month EBITDA and net income margins are currently negative.
The stock has lost 26.8% in price over the past six months to close Friday’s trading session at $11.33. And on October 23, 2021, Kaskela Law LLC announced that it would investigate SKLZ on behalf of the company's stockholders based on an amended securities fraud complaint. But despite the financial weakness, in terms of forward EV/S ratio, the stock’s 10.48x is 318.4% higher than the 2.50x industry average. In addition, its 11.87x forward P/S is 584.8% higher than the 1.73x industry average. So, we think it is wise to avoid the stock now.
However, the video-gaming industry is poised for solid growth thanks to the introduction of engaging content and continued innovations. According to a Mordor Intelligence report, the global gaming market is estimated to grow at a 9.6% CAGR through 2026. Therefore, we think investors looking to benefit from the industry’s growth should instead bet on quality video gaming stocks Electronic Arts Inc . (NASDAQ:EA), Playtika Holding Corp. (PLTK), and DoubleDown Interactive Co., Ltd. (DDI).