Video games have come a long way in the 62 years since nuclear physicist William Higinbotham created “Tennis for Two.” The “Pong” predecessor was an electronic tennis game powered by an analog computer using an oscilloscope that had a display diameter of five inches. Today, you can throw on the virtual reality headset and escape to a world where you’re fighting your way through zombie-infested death pits. There’s something for almost everyone. And that’s the point, argues contributor Jimmy Butts.
This is the fourth and final article in a series of “one stock going into 2021” by our contributors. In the last couple of weeks we heard from Adam Fischbaum, Tom Carr and David Sterman who shared their own picks for 2021.
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My wife hates it. And my one-year-old tosses the discs around the room like frisbees. My gaming console — Xbox — hasn’t been used for gaming purposes in years. But I have a lot of friends who still enjoy playing the latest iteration of Tom Clancy’s Call of Duty, FIFA soccer, or Madden NFL.
I also keep close tabs on the gaming industry for professional reasons. For one, it typically doesn’t garner the attention that other industries do. It gets buried under the “technology” umbrella, but many people don’t realize that the gaming industry is massive… and is delivering big returns to savvy investors.
More than 160 million Americans play video games. Worldwide, that figure jumps to 2.5 billion. That means nearly one-third of the global population plays video games.
The gaming space is expected to reach $200 billion by 2022 — and grow at a compound annual growth rate of 21%.
Think about this: The Call of Duty franchise — a first-person shooter game — generated more revenue than the Marvel and Star Wars franchises commanded at the box office combined.
Needless to say, this is a huge and growing market with massive tailwinds. And one that I’d ride into 2021 and beyond.
There are a number of ways you can take advantage of this explosive industry. You could invest in the “big boys” like Electronic Arts (EA), which makes popular franchises FIFA soccer, Madden NFL, Apex Legends, and the Star Wars series Battlefront. Then there’s Activision Blizzard (ATVI), which produces games like World of WarCraft, Call of Duty, Candy Crush, and Overwatch.
An investment in either one of those names would have produced returns that more than doubled what the broader market offered in 2020…
While I do believe both companies should continue to do well, for 2021 I’m going to swing for the fences.
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The Gaming Platform That Went Public via ‘SPAC’
This has been an odd year for the market, to say the least. Such was the case with the initial public offering (IPO) side of things as well.
This has been the biggest year for IPOs in terms of proceeds, filings and completed deals since 2014. Just look at the recent IPOs of Airbnb (ABNB) and DoorDash (DASH), which went public earlier this month. They come to the market sporting massive market capitalizations of more than $90 billion and $50 billion, respectively.
But it wasn’t just the size and number of IPOs that made 2020 interesting. Another feature was the rise in popularity of so-called special purpose acquisition companies, or “SPACs,” often referred to as “blank-check companies.”
SPACs are shell companies whose sole purpose is to raise money through an initial public offering to buy or merge with another (real) company.
So, you have these companies that are publicly traded, yet have no operations. They typically have an underlying business in mind, but you may or may not know what that company is. The money is raised and then they pursue a private company to purchase and merge with.
For example, popular sports betting company DraftKings (DKNG) went public in April via a SPAC. First, shell company Diamond Eagle Acquisition (DEAC) raised money on the market, then merged with DraftKings and SBTech Limited, after which DraftKings began trading (essentially in the place of DEAC) as DraftKings (DKNG). So, in the end DraftKings was brought to the public marketplace through a merger with Diamond Eagle Acquisition.
Now, the same investors that brought us DraftKings created another shell company called Flying Eagle Acquisition (FEAC). The underlying business — and my pick for 2021 — is a company called Skillz, which began trading on the New York Stock Exchange on December 17 under the ticker “SKLZ.”
Skillz provides a platform to turn any mobile game on iOS and Android into one you can play with friends or strangers for cash, prizes, or points. It also enables esports tournaments for games that are integrated into its platform.
When the company released third-quarter results on November 18, it showed revenue of $60 million, which was a 92% year-over-year increase. Gross profit was $56.9 million, giving the firm a cushy gross margin of 95%.
It should be noted that Skillz did lose $42.9 million during the third quarter, but it does boast a clean balance sheet. At the end of the third quarter, it had $56.8 million in cash and zero debt.
Some key metrics showed promise during the third quarter. Its monthly active users during those three months totaled 2.7 million. Its gross marketplace volume was $411 million — these are the total entry fees paid by users for contests hosted on Skillz’s platform. Both of these figures were big improvements over the 1.7 million monthly active users and gross marketplace volume of $234 million during the same period in 2019.
Skillz is the first mobile eSports platform to go public and should be in prime position to take advantage of the booming video game and esports space.
To be sure, this investment isn’t for the faint of heart, as it just went public in December and doesn’t turn a profit. Shares may see outsized volatility, so you must be able to stomach wild swings in share price. But like I said, for 2021 I’m swinging for the fences.
Action to Take: Consider buying Skillz (SKLZ) up to $23 per share. Sell half once you’re up 100% on your position.
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