Playtika Holding Corporation (PLTK) and Skillz Inc. (SKLZ) are two prominent players in the video gaming industry. PLTK is an Israel-based digital entertainment company that develops, publishes, and distributes its mobile games to customers worldwide through various web and mobile platforms and its proprietary platforms. SKLZ is a San Francisco concern that delivers a mobile game platform that hosts tournaments and competitions, serving and connecting game developers and end-users worldwide.
Expanding their monthly active user bases amid the pandemic has helped companies in the video game industry generate huge profits. The launches of Microsoft Corporation’s (MSFT) Xbox Series X/S and Sony Corporation’s (SONY) PlayStation 5 in late 2020, along with Netflix, Inc.’s (NFLX) expansion plans into video games, has been incentivizing companies to develop captivating video games to compete and maintain their user bases in response to peoples’ desire to return to outdoor entertainment alternatives. The global mobile gaming industry is projected to grow at an 11.5% CAGR to $153.50 billion by 2027. Rising investor optimism in the industry is evident in the Global X Video Games & Esports ETF’s (HERO) 14.6% returns over the past nine months. So, both PLTK and SKLZ should benefit from the industry tailwinds.
In terms of their past three months’ performance, SKLZ is a winner with marginal gains, versus PLTK’s negative returns. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
On March 11, 2021, PLTK took on a seven-year $1.90 billion term loan, increased its revolving credit facility with a new five-year maturity to $600 million, and consummated its previously announced $600 million senior notes offering. The company intends to use borrowings under the term loan and the net proceeds from the notes offering to repay its existing $2.38 billion term loan and for other general corporate purposes. The move should generate significant savings, reducing its annual cash interest payments by more than $80 million, which should benefit its net income, EPS, and free cash flow in 2021.
On July 7, 2021, The Klein Law firm announced the filing of a class-action lawsuit against SKLZ, alleging that the company had made materially misleading statements to the market. The three games that comprised the majority of SKLZ’s revenue had been suffering a significant decline since November 2020, and this condition was allegedly misrepresented by SKLZ’s revenue recognition policy. Such allegedly unrealistic growth projections, declining downloads of its popular games, and the provision of incentive bonus payments to its gamers that would ultimately inflate the company’s revenue, are likely to make investors lose confidence in the stock now.
Recent Financial Results
PLTK’s revenue for its fiscal first quarter, ended March 31, 2021, rose 19.6% year-over-year to $638.90 million. The company’s income from operations came in at $130.30 million, up 15.1% from the prior-year period. However, its comprehensive income has been reported at $25.70 million, which represents a 23.3% year-over-year decline. Its EPS came in at $0.09, which represents almost no change year-over-year. As of March 31, 2021, the company had 963.80 million in cash and cash equivalents.
For its fiscal first quarter, ended March 31, 2021, SKLZ’s revenue increased 92.1% year-over-year to $83.68 million. The company’s gross profit came in at $79.42 million, up 94.7% from the prior-year period. However, its loss from operations has been reported at $51.47 million, which represents a 237.9% year-over-year rise. While its net loss increased 245.3% year-over-year to $53.59 million, its loss per share increased 166.7% year-over-year to $0.16. The company had $612.58 million in cash and cash equivalents as of March 31, 2021.
Past and Expected Financial Performance
PLTK’s revenue and EBITDA have grown 26% and 5%, respectively, over the past year. The company’s EPS has declined at a 60.5% CAGR over the past year.
Analysts expect PLTK’s revenue to increase 10.5% year-over-year in the current year and 7.5% next year. Its EPS is expected to increase 68.6% in the current year but decline marginally next year.
In comparison, SKLZ’s revenue and EBITDA have increased 98% and 275.6%, respectively, over the past year. The company’s EPS has grown 497.3% over the past year.
Analysts expect SKLZ’s revenue to increase 63.4% in the current year and 47.3% next year. However, its EPS is expected to remain negative both in the current year and next year.
Profitability
PLTK’s trailing-12-month revenue is 9.2 times SKLZ’s. PLTK is also more profitable, with a 24.4% EBIT margin versus SKLZ’s negative value.
Also, PLTK's levered free cash flow margin and ROTC values of 23.4% and 22.5%, respectively, compare favorably with SKLZ’s negative values.
Valuation
In terms of non-GAAP forward P/E, PLTK is currently trading at 17.31x, compared to SKLZ’s negative 31.69x. SKLZ’s 15.97x forward EV/Sales is 280.2% higher than PLTK’s 4.20x.
Also, in terms of trailing-12-month Price/Sales, SKLZ’s 18.37x is 395.1% higher than PLTK’s 3.71x.
POWR Ratings
While SKLZ has an overall F grade, which translates to Strong Sell in our proprietary POWR Ratings system, PLTK has an overall B grade, which equates to Buy. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
PLTK has a B grade for Value, which is consistent with its lower-than-industry valuation ratios. PLTK’s 15.75x forward EV/EBIT value is 14.8% lower than the 18.48x industry average. However, SKLZ’s D grade for Value reflects its overvaluation. The company has a 16.66x forward Price/Sales, which is 786.8% higher than the 1.88x industry average.
In terms of Quality, PLTK has been graded a B, which is consistent with its higher-than-industry profitability ratios. PLTK’s 22.5% trailing-12-month return on total capital is 554.1% higher than the 3.4% industry average. In comparison, SKLZ has a D grade for Quality, which is in sync with its negative return-on-total-capital value.
Of 24 stocks in the Entertainment - Toys & Video Games industry, SKLZ is ranked #24, while PLTK is ranked #1.
Beyond what we’ve stated above, our POWR Ratings system has also rated both PLTK and SKLZ for Growth, Momentum, Stability, and Sentiment.
Get all SKLZ ratings here. Also, click here to see the additional POWR Ratings for PLTK.
The Winner
In-game purchases and the emergence of 5G technology should drive the performances of PLTK and SKLZ. However, lawsuits and certain allegations surrounding SKLZ’s operations we think make PLTK, with higher profitability and lower valuation, a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment - Toys & Video Games industry.
PLTK shares were unchanged in after-hours trading Friday. Year-to-date, PLTK has declined -27.10%, versus a 16.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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