The most famous expression in advertising is probably, “Advertisers go where the eyeballs are.” The evidence suggests that this principle remains as true in 2021 as it was in 2001, 1981 and 1961. And that’s bad news for the owners of Skillz (NYSE:SKLZ) stock.
That’s because Skillz, a platform that enables and streams e-sports, i.e., video game tournaments, doesn’t have gigantic audiences and probably never will. And the other truism on the ad business is that audience quantity is much more important than ad quality.
The key reason that Facebook (NASDAQ:FB) and Alphabet’s (NASDAQ:GOOGL) Google, for example, make a staggering amount of money from advertising is that so many consumers spend so much time on their platforms.
One of the arguments of the SKLZ stock bulls is that the company will succeed because its platform features exceptionally powerful, engaging ads.
But I’m certain that it’s possible to find many websites, apps, and even TV shows with cooler ads and higher response rates than what Facebook and Google offer.
For example, the ads I’ve seen on Roku’s (NASDAQ:ROKU) platform are, on average, I believe, much more engaging and entertaining than those on Facebook and Google. But advertisers are much more drawn to the latter two companies than to Roku because of the huge audiences that Facebook and Google draw.
Audience Growth Isn’t Happening
Skillz’s audiences just aren’t very large. In the first quarter, the company reported monthly average users of 2.7 million, up just 4% versus the same period a year earlier. that’s not a very impressive total or rapid growth.
Moreover, e-sports as a whole is not a very big phenomenon, so Skillz’s growth outlook isn’t that strong. In my last column on SKLZ stock, I reported that ” 3.1 billion hours of esports were viewed in Amazon’s (NASDAQ:AMZN) Twitch system,” a worldwide platform which features many e-sports channels.
But 3.1 billion hours over a quarter for a global platform actually aren’t very impressive. As I pointed out in the previous column, an NFL divisional playoff game shown on one American TV network in January 2020 was watched for around 367 million hours.
For more perspective on the issue, 1.84 billion people were daily users of Facebook in December 2020, and ” On average, users spend 34 minutes on the site daily.”
E-Sports Is Not the Next Social Media
In all likelihood, Skillz’s platform will not attract a huge number of people in the foreseeable future.
In my research for my two articles on the company and in my everyday life, I have not seen any signs that e-sports is becoming wildly popular among adults in the U.S. or elsewhere in the Western world.
Put another way, there appears to be no evidence that e-sports is the next social media. I remember that from 2007-2009, I heard and read a great deal of information about Twitter (NASDAQ:TWTR) and Facebook. Now virtually the only time I hear and read about e-sports is when I’m reading or writing about stocks.
What’s more, in my most recent column on Skillz, I theorized that the platform would face a great deal of competition because many video-game systems now allow multiple people to play against others online.
Evidence of such competition is already surfacing. specifically, Seeking Alpha columnist Konrad van Kempen, citing short-seller Wolfpack Research, reported that the number of installations of Skillz’s three most-popular games, which account for nearly 90% of its sales, have meaningfully dropped.
Staying on competition, in a recent column on DraftKings (NASDAQ:DKNG), I noted that, in-line with my long-term thesis, competition in sports betting in the U.S. is intense. I expect a similar phenomenon to play out when it comes to e-sports betting, a business that Skillz has entered.
The Bottom Line on SKLZ Stock
Even if Skillz has the most captivating ads in the world, marketers aren’t going to pay that much to advertise on its platform until its audience explodes. And that doesn’t look poised to happen anytime soon.
Therefore, trading with an enormous trailing price-sales ratio of 27.7, SKLZ stock definitely remains a sell.
On the date of publication, Larry Ramer held a long position in Roku. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.