Top News

#1: What Went Wrong for Skillz?

Source: Skillz

From tech darling to penny stock in less than two years, the rise and subsequent collapse of Skillz is emblematic of pandemic-era euphoria. Low interest rates led to easy access to margin for swarms of retail investors who were working from home or laid off due to COVID-19. Many turned to video games as a way to pass the time and stay connected with others. This surge in demand led to increased sales and revenue for gaming companies, which in turn drove up their stock prices. 

Skillz represented the confluence of the most popular trends during this era. The application, which is available on iOS and Android devices, enables game developers to incorporate competitive gaming elements into their mobile games. The platform provides a variety of tools and services that allow developers to create multiplayer competitions, leaderboards, and other features that enhance player engagement and retention.

With Skillz, game developers can add real-money gaming to their titles and offer players the opportunity to compete in head-to-head tournaments or participate in larger-scale events. Skillz handles the backend infrastructure, including payment processing, fraud prevention, and game balancing, allowing developers to focus on creating engaging gameplay experiences. It also provides players with a social network and community, with a cross-studio and cross-platform integrated chat experience. 

Source: Skillz

The company went public via SPAC on December 17th, 2020. Even before its debut, the stock traded well above its $10 net asset value, with SKLZ exceeding $17 a day before its SPAC. Shares continuously surged from this point, reaching all-time highs of $43.72 on February 5th, 2021. This represented a $16 billion market cap, nearly five times higher than its SPAC valuation. 

February 2021 represented record highs not only for Skillz but also for hundreds of other tech high-flyers. The month was the inflection point for inflation, though Federal Reserve rhetoric still called for easy monetary policy. This all changed for the broader market in November that year, as the Fed prepared to execute its first of many interest rate hikes. What made companies like Skillz turn early was their hypersensitivity to the potential of hikes due to nonexistent profitability. The best benchmark of these sorts of companies is the ARKK ETF, which also peaked in February 2021 and was down over 20% by November, when the S&P 500 notched record highs.

Skillz was unable to narrow their EBITDA losses since going public. TTM losses have exceeded $100 million consistently, and while the most recent quarter ended December 31st, 2022 had the narrowest loss yet, this has proven too little, too late. The stock only rose 11% in reaction to losses $22.2 million narrower than expectations. 

Source: Koyfin

Like FaZe, the lack of an S-1 led investors to do their due diligence with Skillz’ investor presentation that coincided with the SPAC filing. The deck was filled with lofty promises around the platform's profitability. One example is the slide on the Skillz business model that projected a 95% gross margin and 25% operating income margin. Between FY 2019 and FY 2020, operating losses grew more than four times from -$24.8 million to -$103.2 million. The year after, losses nearly tripled to -$274.3 million. Losses outgrew revenues by a wide margin every year as Skillz poured money into advertising their platform on iOS and Android, something not mentioned anywhere in the deck. 

Top-line growth has decelerated every year since FY 2019, before the company went public. Revenues grew 136% in 2019, 91% in 2020, and 66% in 2021. 2022 was a disastrous year, as revenues fell 29% to $270 million, or just 18% higher than the 2020 figure. This was met with a 93.2% decline in SKLZ share price in 2022, among the worst for any publicly traded company.

Monthly active users plunged last year. In 2020, the company had 2.6 million players who entered into a paid or free contest on the platform at least once per month. In 2021 MAUs grew to 2.95 million, before falling to 2.1 million users in 2022. The company wants investors to focus on paying monthly active users, but these also fell from 513,000 in 2021 to 386,000 in 2022. Attempts to convert MAUs to paying MAUs have led to high sales and marketing expenses, but the ratio remained stable at 18% between 2021 and 2022, meaning this spending proved futile. 

CEO Andrew Paradise made $103 million in 2020, the third most among all gaming CEOs, trailing only Playtika’s Robert Antokol and Activision Blizzard’s Bobby Kotick. This was a 3,149% increase over the year prior, primarily due to options awards associated with Skillz’ surge that year. This type of compensation structure ended up being very detrimental to shareholders, as the company’s market cap is now less than three times Paradise’s compensation for one year at the top. Furthermore, despite Skillz’ stock falling 68% in 2021, Paradise raked in another $75.3 million, with cash compensation falling less than 1%.

In December last year, Skillz received notice from the New York Stock Exchange that it fell out of compliance with the venue’s share price listing rule. The trigger for noncompliance is for a company’s stock to trade for less than $1 over a consecutive 30-day period. To cure this issue, Skillz must have a “closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month.” This can occur at any time within a six-month period following the notice. 

Unfortunately for shareholders, the last time Skillz ended the month with both a $1 share price and a 30-day moving average of $1 was in October 2022. Even with the current 57% run-up that started in mid-March, the stock was trading at only $0.75 on April 13th. The darker line in the graph below represents the 30D MA while the lighter one is the spot price. Compliance with the rule will almost certainly have to be regained with a reverse stock split. The other option would be for management to opt for share buybacks, but given the current $490 million in cash and short term investments versus $343 million in liabilities, such a buyback may be unwise. Skillz’ cash position has exceeded $200 million every quarter since FY2020 4Q. 

Source: Koyfin

It doesn’t help that management barely has confidence in their own company, either. Skillz surged 25% on April 6th, before the long Good Friday weekend, as Paradise bought 1.5 million shares the previous day at roughly 56 cents per share. However, this was the only insider purchase made in Skillz over the last year. The purchase equates to 0.5% of the total share float. It also amounts to a small fraction of his total compensation.

As Skillz has taken on more debt, interest expenses in 2022 amounted to $24 million, up significantly from $1.2 million in 2021.  With an interest coverage ratio of -4.9x (based on EBITDA), the company now runs the risk of default if it needs to take on more debt at current interest rates. 

The death spiral for Skillz is slated to continue. The game selection on the platform is lacking, as developers are just not incentivized to bring their titles over to a dying platform. Furthermore, if the company could not turn a profit during the quarters where player engagement was highest, it is unlikely it will ever do so sustainably. Recent partnerships, such as its deal with UFC, will probably not make a material impact in future quarters, particularly as UFC parent company Endeavor shifts its focus to its acquisition of WWE. 

#2: Exploring the Tide of Video Game Adaptations

video game adaptations
Source: IGN

The 2020s have been the decade of successful video game adaptations, ushering in a golden age for the medium. Popular game franchises are being adapted for television and film, and their commercial success has led to a sizable pipeline of future releases. So far this year, both the highest grossing movie (The Super Mario Bros. Movie) and highest rated television show (The Last of Us) are based on gaming IP. While not all recent shows and movies based on video games have been critically acclaimed, many have enjoyed high audience appeal and have turned a profit (and in some cases led to surging game sales), creating a flywheel in which even more media is licensed for future adaptation to capitalize on rising consumer interest. 

In 1993, the live-action Super Mario Bros. movie released to resoundingly bad reception. The film was panned by both critics and audiences, who criticized its writing, acting, and overall execution. It didn’t help that the film had a $48 million budget in 1993, and grossed just $39 million worldwide. The film’s flop also led to caution regarding live-action adaptations, though special effects technology and advanced CGI would take years to become viable. Unfortunately, the box office bombs continued for decades, with films like Mortal Kombat: Annihilation, Doom, and Assassin’s Creed, to name a few, all underperforming. Directors were just not able to faithfully recreate the source material on the big screen, no matter how large the budget, and the lack of perceived mainstream appeal of gaming often resulted in adaptations that failed at catering to both hardcore fans and newcomers to the IP. 

Advancements in technology over the last three decades have provided for faithful recreations of video game IP using CGI. The budget of the original Mario Bros. movie budget equates to $100 million today, the exact same as the superior 2023 animated Mario film. The creation of dedicated computer animation houses like Illumination and Marza allow game companies to outsource production while keeping strict oversight over their product. Nintendo, which is known for closely protecting its IP, ultimately greenlit this latest project after three decades in which the only films it produced were Pokémon films and only one of which, Detective Pikachu, was live-action. 

The Numbers. Super Mario Bros. Movie gross through April 12th.
Source: The Numbers. Super Mario Bros. Movie gross through April 12th.

In contrast to Nintendo, Sega has been more willing to explore live-action, though it also took three decades for a Sonic film to go from the planning stage to release. The 2020 Sonic the Hedgehog movie combined live-action and animation, and it began as a joint venture between Sony Pictures and Marza Animation Planet in 2013. Paramount Pictures acquired the rights from Sony in 2017, though the film was delayed by three months after Sonic’s model drew widespread backlash from critics and fans. 

Despite receiving middling critical reviews, audiences polled by CinemaScore gave the film an “A” rating. This led to a $320 million box office off a $90 million budget, making the movie a commercial success. Sonic the Hedgehog 2 did even better when it released in 2022, grossing $405 million off a $110 million budget. A third installment is scheduled for a holiday 2024 release, while a spin-off starring Knuckles is also in the works. 

Source: Statista

The Last of Us, a live-action series for HBO, has also been a resounding success. The series premiered on January 15th this year and released episodically on linear TV via HBO and streaming on HBO Max. The show’s premier episode was the second-largest debut for HBO since 2010, and was such a success the second-week audience growth was the highest for an original drama series in HBO’s history. Not only is The Last of Us a great video game adaptation, it is a great show in its own right, holding an 8.9 rating on IMDb. 

Source: IMDb

The 2022 Halo series for Paramount+ is another example of a video game adaptation made for streaming. While the series was met with mixed reviews, it was still the second-most watched original series for Paramount+ through June 2022. Halo was renewed for a second series, though other adaptations have been less fortunate. Netflix’s Resident Evil was canceled after just one season, and is one of Netflix’s worst-rated shows based on audience reception.

Sega and Nintendo are just two of the dozens of gaming publishers using their abundance of original IP to make inroads in other media formats. Even before the successful debut of The Super Mario Bros. Movie, there are 35 film and 24 TV adaptations of gaming franchises in the works, according to IGN. Almost all of these had either an unannounced release date or their development status was unknown. Given that Mario Bros. is slated to 10x its budget and gross above $1 billion by the time its run is over, many of these adaptations are likely to be fast tracked. Some popular IPs that have movies planned around them include Borderlands, BioShock, and Just Cause. 

Gaming has had a growing cultural impact on the world. As explained by Matthew Ball in his piece from 2020, Hollywood’s heightened interest in gaming is not only due to the potential appeal of gaming IP, but also because of the increasing cultural influence of gaming, which has benefited from technological advances that allow for immersive storytelling experiences and the creation of culturally-resonant content and stars. This has led to a shift in the perception of tie-in games and licenses, which historically were seen only as easy avenues for monetization. 

Furthermore, Ball explains that the gaming industry today is an analogue to the heyday of the comic book industry, where rich storylines were developed over many years of work. Similar to how Marvel owns the rights to thousands of characters, video game companies are creating a tremendous amount of content, where the best content rises to the top. This dynamic means that the best ideas and storylines can be cherry-picked for adaptation.

Video game adaptations have entered a new phase of popularity. While past failures like the 1993 Super Mario Bros. movie made studios cautious about adapting video games, advancements in animation technology and the success of recent adaptations like Sonic the Hedgehog, The Last of Us, and the newest Mario film have created a flywheel effect leading to an ever-expanding pipeline of new content. Not all adaptations have been critically acclaimed, but most have been successful with audiences, leading to increased sales for the original games. With a bounty of games available for adaptation, it is likely that we will continue to see many more in the future, as Hollywood races to control the hottest IP. 

Top Movers

Weekly Top Gainers
  • For the week ending April 14th, 2023: the average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was 1.74%. The S&P 500 returned 0.79% and the Nasdaq-100 returned 0.13%.
  • IGG led gaming company gains for a second consecutive week, after surging nearly 40% the week ending April 7th. The recent positive momentum may be due to the popularity of Doomsday, the publisher’s second most popular mobile game, which was released in September 2021. The app was downloaded over 6 million times in March across iOS and Google Play stores, nearly doubling its cumulative lifetime downloads. Data from the first two weeks of April indicates growth may be accelerating. Doomsday has likely benefited from the TV adaptation of The Last of Us, which shares the same zombie survival theme.
  • Playtika was the top loser last week, after being one of the top performers a week prior. The stock was downgraded by BofA analyst Omar Dessouky from “neutral” to “underperform,” with a new price target of $10, down about 8% from the current price. Playtika’s acquisition discussions with Rovio ended in March, and the Finnish Angry Birds developer has now signed an acquisition deal with Sega for $775 million instead

Most Notable Strategic Investments

  • On April 10th, Take-Two Interactive announced a new notes offering, its first since last April. The gaming publisher will sell $1 billion in senior notes, consisting of $500 million of 5.00% notes due in 2026, and $500 million of 4.95% notes due in 2028. Part of these proceeds will be used to repay its term loan in full, which last had a principal balance of $350 million and matures on June 21st, 2023. This loan was based on SOFR and was used to finance some of the convertible notes that settled from the Zynga acquisition. The remaining proceeds from the deal will be used for general corporate purposes including the repayment of additional debt. As of the issuance date, Take-Two was rated Baa2 by Moody’s and BBB by S&P. (Link)
  • Aonic, a Swedish video game collective of small to midsize studios, acquired a majority stake in Milky Tea, the developers of HyperBrawl Tournament. HyperBrawl is an arcade-style sports arena title available on Apple Arcade, Steam, and console. Aonic claims to operate as a decentralized collective rather than as a portfolio of studios, while providing knowledge transfer opportunities and shared technology infrastructure. The group was founded in 2021 by Oliver Heins, a gaming industry veteran, and Paul Schempp, a private equity and investing professional. Aonic plans on investing over $100 million in gaming through 2024, and has already made sizable investments including a $35 million investment into VR developer NDreams. (Link)
  • VideoVerse, a video editing software company, has acquired, a firm that uses AI to create esports and gaming videos, for an undisclosed sum.'s technology can identify key moments within a game and can streamline the video content creation process, by going through hours of video to highlight the best moments. Daniel Evans, CEO of, said in an interview with GamesBeat that the “sheer volume of content” within gameplay footage necessitates the use of AI, as otherwise a sizable team of human editors would be required.(Link)

Most Notable Venture Financings

Source: Entrackr
  • Mayhem Studios raised $20 million in its Series A round, which was led by Sequoia Capital. Mayhem is the mobile game development studio of the Mobile Premier League (MPL), a skill-based esports platform in India. According to filings, MPL now holds 54% of Mayhem Studios, Sequoia owns 19%, and CEO Ojas Vipat and a handful of other investors own the balance. The fundraising is a part of MPL’s recent efforts to reorganize and raise money amid a challenging esports environment. Last May, the company laid off 10% of its workforce and exited the Indonesian market. MPL’s last funding round was its Series E in September 2021, where it raised $150 million at a $2.3 billion valuation. (Link)
  • Grand-Attic, a mobile game developer based in the UK, raised $5.3 million in its second seed round. The raise, which was led by Makers Fund, coincides with a naming rebrand from Hadi and a location move from Istanbul to London. The company plans on retaining its remote-work policy and continuing to hire out of Turkey, while expanding its development resources into Europe. Grand-Attic is behind two games currently exclusive to Google Play, Pocket Farm and Pocket Land. Both were released in 2022 and have combined lifetime downloads of 579k, according to (Link)
  • Web3 gaming platform Gameta raised $5 million in its seed round, led by Binance Labs. The platform has over 7 million users since launching in 2022, and claims to be the top GameFi app in terms of unique addresses as of Q4 2022. Gameta utilizes the BNB Chain for its ecosystem. Its newest title, Hippo Dash, was released on March 20th on APK and the Google Play store.

Other News

Source: Nintendo
  • Last Tuesday, Nintendo announced Nintendo Live 2023, an in-person event in Seattle taking the place of E3. This is the first “Live” event for the company outside of Japan, following its return in 2022 after three years of cancellations due to the pandemic. The event will be for fans of all ages and will feature “Nintendo Switch gameplay, live stage performances, tournaments, and photo ops” among other activities. Other details about the event will be announced at a later date. Nintendo also released the final trailer for its Breath of the Wild sequel, Tears of the Kingdom, on Thursday. The game is releasing on the Switch on May 12th. (Link)
  • Suicide Squad: Kill the Justice League was delayed again by Rocksteady Studios. The game was initially supposed to launch in 2022, but was pushed back to May 2023 following an announcement at last year’s Game Awards. On April 13th, Rocksteady announced the game was delayed again to February 2024, due to negative player reception after the game’s demo on the February 2023 PlayStation State of Play. The studio said it would be sharing progress on its development in the coming months. (Link)
  • An Eve Online player pulled off the biggest heist in the game’s history. In a post on the Eve subreddit, user Flam_Hill outlined how he and a partner performed a heist worth about 2.23 trillion ISK, or about $22,300 in real-world money. Utilizing a new account, Flam_Hill was made CEO of a 299-member corporation called Event Horizon Expeditionaries after being voted in with just two votes — him and his co-conspirator. The partners noted that many in the corporation were inactive, making it possible to win an election with no additional backing. They then removed all other directors, emptied the corporate wallet, and stole all the assets including multiple capital ships. Eve Online developer CCP Games acknowledged the heist but did not state whether any action would be taken. (Link)
  • The Super Mario Bros. Movie continued its rampage at the box office, beating second weekend projections by a landslide. The movie has now made $678 million worldwide, $200 million more than second place Ant-Man and the Wasp in the 2023 box office standings. At this pace, it will eclipse $1 billion well before the end of its run, and will likely stand as the highest grossing movie of the year. The film’s audience score on Rotten Tomatoes is 96%, while critical reviews remain “rotten” with a 58% score. (Link 1) (Link 2)

A big thanks to Mario Stefanidis, CFA for writing this update! If Naavik can be of help as you build or fund games, please reach out.

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