Mobile gaming platform Skillz (SKLZ) scored a 27% gain in stock price Wednesday after announcing that it will acquire marketing platform Aarki, promising to "unlock new points of connectivity between consumers, developers, and brands," and employ Aarki's machine learning algorithms to match up "the right [advertisement] with the right user at the right time."
At least one analyst thinks Aarki is a good match for Skillz itself.
Aarki "is expected to generate roughly $30 million in revenue in FY:21, has a history of growth, and is profitable, making it accretive to Skillz’s core business," explains Wedbush's Michael Pachter. And it's worth noting that the $150 million that Skillz will pay for its prize is only 5x Aarki's annual sales, a considerable discount to Skillz's own 25-times-sales valuation — and another point in the acquisition's favor.
In addition to the valuation argument, Pachter believes Aarki could improve Skillz's business model.
"We expect the acquisition of Aarki to bring greater ad spending efficiency to Skillz and its developer partners," says Pachter. He notes that demand-side platforms such as Aarki generally charge 20% to 30% of a company's marketing budget as their fee for "user acquisition" advertising campaigns. Even if Skillz continues to use other demand-side platforms, in addition to Aarki, to in its advertising, bringing Aarki in house will save Skillz that 20% to 30% on ads placed through Aarki. And Pachter predicts that this acquisition will thus yield "cost savings [that] could flow through to overall profits or be re-invested into [user acquisition] spending that delivers a higher ROI" for Skillz.
To this end, Pachter reiterated an Outperform (i.e. Buy) rating on Skillz stock, along with a $34 price target. Investors could be pocketing gains of ~66%, should the analyst’s forecast go according to plan. (See Pachter's track record, click here)
But not everyone is as impressed. In a separate report, Wells Fargo analyst Brian Fitzgerald left his own Equal Weight (i.e. Hold) rating on Skillz, and his $18.50 price target — barely half of what Wedbush thinks the company is worth — unchanged. (See Fitzgerald's track record, click here)
Calling the Aarki acquisition "not unexpected given the firm's growth ambitions and customer segments," Fitzgerald warns that he simply doesn't "see Aarki as an immediate game changer in terms of accelerating paying user acquisition" for Skillz. Aarki, notes Fitzgerald, "is significantly smaller than the ad tech players most familiar to mobile game developers." Furthermore, it appears to be largely a foreign operation with perhaps less insight into the U.S. advertising market than those other ad tech players. "The majority of [Aarki employees]," says Fitzgerald, "are overseas, mostly in the Philippines."
Overall, Wedbush's Pachter is the more optimistic analyst on Skillz, anticipating that the stock will outperform the market over the next year, and valuing Skillz at 17 times his revenue estimate for fiscal year 2023 — $830 million. Why not value the stock on its earnings?
Simply put, because Skillz has no earnings, and as Fitzgerald makes clear, it's not likely to have any earnings anytime soon. According to the Wells Fargo analyst's estimate, Skillz's losses will probably decline to $0.52 per share this year and to $0.36 per share next year — but the company won't earn any profit before 2023 at the earliest.
What do other analysts say about the mobile game maker? TipRanks analytics show that out of 6 analysts, 4 are bullish, while 2 remain sidelined. The consensus price target of $25.08 shows a potential upside of 21.5%. (See SKLZ stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.