With millions of people staying at home and turning to indoor entertainment amid the COVID-19 pandemic, popular e-sports and gaming companies Skillz Inc. (SKLZ) and Electronic Arts Inc. (EA) have secured substantial increases in their user bases over the past year. Founded in 2012, SKLZ is a mobile gaming platform that hosts casual e-sports tournaments and connects players worldwide. EA is a developer and publisher of games and services across various genres, such as sports, action, role-playing, and others.
With ticket sales moving from live arenas to online platforms, the e-sports sector has gained immense traction and entered mainstream entertainment around the world of late. Furthermore, the rising popularity of online sports tournaments and impressive prize pools are expected to fuel the demand in the e-sports market. With these positive catalysts in mind, we think both EA and SKLZ will perform well in the long run.
In terms of year-to-date performance, SKLZ is the clear winner with 33.8% gains versus EA’s negative returns. But which of these stocks is a better pick now? Let’s find out.
Latest Movements
On March 19, SKLZ announced a forthcoming public offering of 32 million shares of its Class A common stock, which it expects to close on or about March 23. The company plans to use the offering’s proceeds for working capital and general corporate purposes.
This month, law firms Wolf Popper LLP and Lowey Dannenberg P.C. launched investigations on behalf of SKLZ’s investors on claims of potential securities fraud. We believe this could negatively impact the stock’s share price in the near term.
Also this month, Respawn Entertainment, a studio of EA, released Apex Legends on Nintendo Switch in its latest limited time event, the Chaos Theory Collection. The new launch should deliver an innovative experience to its gamers on new platforms and thereby drive considerable business growth.
Last month, the company completed the acquisition of Codemasters Group Holdings to bring gaming fans new and exciting racing content, while reaching across more platforms and more regions of the world. The combined portfolio should foster further growth for EA.
Recent Financial Results
In the fourth quarter, ended December 31, 2020, SKLZ’s total revenue grew 94.9% year-over-year to $67.72 million. Also, the company’s gross profit increased 95% from the prior-year quarter to $64 million. However, it reported a net loss of $43.93 million and an operating loss of $43.24 million over this period. Its loss per share was $0.14, compared to a loss per share of $0.07 during the comparable quarter in 2019.
EA’s net revenue has increased 5% year-over-year to $1.67 billion in its fiscal third quarter ended December 31. The company’s operating cash flow grew 1.8% from the prior-year quarter to $1.12 billion, while its net bookings rose 18.8% from the year-ago value to $2.40 billion. Its cash and cash equivalents increased 32.4% year-over-year to $4.77 billion.
Here SKLZ is at a disadvantage.
Expected Financial Performance
SKLZ’s revenue is expected to increase 60.2% in its fiscal 2021 and 54.8% in 2022. The Street expects the company’s EPS to increase 20% in the current year and 46.9% next year.
In comparison, analysts expect EA’s revenue to increase 16.6% in the current year and 6.8% next year. EA’s EPS is expected to grow 15.6% in the current year and 10.3% next year.
Profitability
EA’s trailing-12-month revenue is almost 25 times SKLZ’s. But SKLZ is more profitable with a gross profit margin of 94.7% versus EA’s 74.5%.
However, EA’s ROE and ROA of 15.5% and 6.7%, respectively, compare favorably with SKLZ’s negative respective returns.
Valuation
In terms of trailing-12-month price/sales, SKLZ is currently trading at 39.28x, 484.5% higher than EA, which is currently trading at 6.72x. Also, its trailing-12-month ev/sales of 48.18x is significantly higher than EA’s 5.73x. In terms of trailing-12-month price-to-book, SKLZ’s 48.32x is significantly higher than EA’s 4.77x.
So, EA is the more affordable stock.
POWR Ratings
EA has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, SKLZ has an overall F rating, which translates to a Strong Sell. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
In terms of Value Grade, EA has a B, which is in sync with its lower-than-industry non-GAAP PEG. In comparison, SKLZ has a Value Grade of F.
Also, in terms of Quality Grade, EA has a B, given its higher profitability. Here, SKLZ’s weaker profitability is evident in its D Quality Grade.
EA has a Sentiment Grade of B, which is in sync with the analysts’ expectation about its earnings and revenue growth. In contrast, SKLZ has a D Sentiment Grade.
Of the 25 stocks in the B-rated Entertainment – Toys & Video Games industry, EA is ranked #5 while SKLZ is ranked #25.
Beyond what we’ve stated above, our POWR Ratings system also rates both EA and SKLZ for Growth, Stability, and Momentum. Get all of EA’s ratings here. Click here to see the additional POWR Ratings for SKLZ.
The Winner
Both EA and SKLZ are good long-term investments considering their expanding global footprint and growing user base. However, EA appears to be a better buy based on the factors discussed here. EA’s superior financials, higher profitability, and earnings growth potential, as well as relatively lower valuation, make it a better investment bet compared to SKLZ we believe.
Our research shows that the odds of success increase if one bet on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Entertainment – Toys & Video Games industry, click here.
Click here to check out our Video Game Industry Report for 2021
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EA shares were trading at $128.66 per share on Friday morning, up $0.66 (+0.52%). Year-to-date, EA has declined -10.29%, versus a 3.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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