Issue #13: The future of mobile gaming and e-sports | Riding the electric vehicle boom 🔋
We've all heard the Warren Buffett quote "be greedy when others are fearful and fearful when others are greedy."
This Fear & Greed Index actually measures the level of emotion in the markets.
The highest level of "fear" in 2020 aligned closely with the bottom of the market.
It might be worth checking this index next time there's a big sell-off.
Let's get into this week’s report. Here’s what we found:
- A company that's tapping into the $77.2b mobile gaming industry.
- A mining company that owns the largest lithium mine in the US, an essential element of electric car batteries.
Skillz Inc. ($SKLZ)
$12.55 - Share price at time of writing
- Skillz is a company that is taking advantage of two major trends: the rise of mobile gaming and the rise of mobile esports.
- Skillz became a popular investment as many investors noticed ARK Invest buying 215,897 shares in January 2021.
- Investors got nervous as Wolfpack Research put out a short report in March highlighting various risks of investing in Skillz.
- Skillz grew Q4 revenues at 95% YoY with 95% gross margins.
What they do:
Skillz lets 2.7 million players a month compete on their mobile for points or prizes in games such as Solitaire Cube and Blackout Bingo.
Skillz runs about 1,700 tournaments a second, Chief Executive Officer Andrew Paradise said in an interview.
Skillz lets small-to-midsize game developers make money without having to sell to a bigger company, or resorting to ads (which many users find annoying). Users pay tournament fees, where Skillz takes a 14% cut.
The ongoing sell-off of growth and technology stocks has been dramatic, despite the broader indices staying close to all time highs.
Skillz has been one of the harder hit stocks. After a dramatic run to $46 per share, the stock has completely imploded over the past couple of months. Shares have fallen to as low as the $14-$15 range.
There has been a bunch of negative events that have happened over the past month that have contributed to the negative price movements. We'll look at how the criticisms of Skillz have been overstated and how it has now become massively undervalued in the medium to long term.
Why they’re spiking in interest:
According to MarketStream.io, Reddit mentions of SKLZ increased by over 388% when comparing the past 30 days to the previous period.
Reddit interest in SKLZ has been growing as ARK Investments continues to buy the stock despite the falling stock price.
The ARKW ETF added around 3 million SKLZ shares during March 2021.
Notable comment from Reddit:
"Cathie been selling (removed) like Amazon and loading up on SKLZ and OPEN. She knows how to take some risks to (removed) print. This is why ARK will always outperform." - reactbooter
Why SKLZ could be valuable:
In Q4 2020, Skillz showed revenues of $67.7 million (95% YoY growth) which was also their 20th consecutive quarter of revenue growth.
Full year revenues came in at $230.1 million, up to 92% over the prior year. This exceeded the full year company guidance of $225 million provided in the Q3 earnings release. Revenue growth for the year was driven by a 101% increase in paying monthly active users.
Skillz sits at the meeting point of two high growth trends in the gaming market.
The first major trend is the increasing popularity of mobile gaming over other forms of gaming. In the past few years, the hardware within smartphones has become more powerful, and when combined with high-speed internet, mobile device performance is starting to approach PC performance.
As 5G becomes more accessible, mobile device performance will become near indistinguishable from a PC's performance.
Gamers can already almost get a similar experience of a PC if the player plugs their mobile phone into a docking station connected to a large screen.
The second major trend is the sharp rise of mobile esports, particularly in countries like India. Mobile esports had already been undergoing substantial growth before 2020 and the pandemic only accelerated the trend. Skillz's current forecasts show that by 2025, the mobile gaming market will reach $161 billion.
Skillz is uniquely positioned to take advantage of both the increase in mobile gaming and the increase in the mobile esports gaming market. Skillz also solves a major problem for developers within the mobile gaming industry regarding monetization.
There's still plenty of market share for Skillz to tap into. So far Skillz has captured just a small chunk of the mobile gaming market with only 0.1% of the world's gamers on Skillz's platform.
What the risks are:
One of the biggest concerns for Skillz is whether they can maintain the growth they've seen so far.
During Skillz's recent earnings conference call, the very first analyst question went straight to the heart of Wolfpack's allegations by asking Skillz management about whether download activity was slowing down in top key games and whether that was something to be concerned about.
Skillz CEO and founder Andrew Paradise answered that question by pointing out that the top titles on the Skillz platform have always rotated over time and that no one really knows what the next number one title will be in the future. Skillz management believes that it is a virtual certainty that the top titles will continue to shift over time.
Lithium Americas Corp. ($LAC)
$13.30 - Share price at time of writing
- The U.S. government is going to invest $174 billion into EVs by 2030.
- Lithium prices are already up 44.3% this year.
- Volkswagen plans to build six 40 Gigawatt electric battery factories by 2030. This will fuel lithium demand.
- Other companies (such as Volkswagen) are also expanding EV battery production while Ford expands its EV capability.
- At these prices, Lithium Americas is undervalued given the demand for lithium approaching.
What they do:
Lithium Americas is a lithium mining company based in Vancouver, Canada. Lithium Americas is currently developing two lithium mining projects, Cauchari-Olaroz, in Argentina, and Thacker Pass, in Nevada, USA.
Lithium batteries are essential for electric vehicles and other non-car electric vehicles such as modern-day e-bikes, e-3 wheelers, e-buses, etc. because of their smaller size and longer life capacity.
Given the developing infrastructure and the US government's plans for net-zero emissions by 2050, the demand for electric vehicles is expected to boom and experts are projecting a growth of 26 million units by 2030 as compared to 3 million during 2019.
Why they’re spiking in interest:
According to MarketStream.io, total Reddit mentions of LAC to date is around 10x greater (on average) than the total Reddit mentions of their competitors.
One analyst shared his opinion on why interest in lithium companies like LAC has grown so dramatically over the past year:
"Millennials who love Tesla are starting to figure out that it does not matter who wins the EV (electric vehicle) wars. It can be Tesla, Volkswagen, Ford, or name your favorite car company. It matters not. All that matters is EV wins with time. The masses are waking up to this idea, but it is nowhere near total saturation."
Signal: Billionaire hedge fund managers Ken Griffin and Joel Greenblatt currently hold 333,000 and 20,500 LAC shares respectively. Source - cheaperthanguru.com
Why LAC could be valuable:
Electric vehicles (EVs) are the biggest trend in transportation around the world.
Trying to switch over the world’s primary fuel source is causing some growing pains.
One of the biggest material inputs is the lithium used in the batteries that power the vehicles. The current global lithium supply is estimated at 312,000 metric tonnes per year. For the time being, this represents an oversupply of global demand. 56% of lithium production currently goes toward batteries, up from 29% in 2013.
Global lithium production is expected to triple by 2025, but may still struggle to meet electric vehicle battery needs.
Lithium is not a rare metal. There’s plenty of it, but it’s tucked away in the earth’s crust. That means you need mines and often large-scale operations to extract it—and these might take years to explore and set up.
Lithium Americas recently completed a round of funding for $100 million for their new Thacker Pass mine based in Nevada, USA (the largest lithium site in the country).
LAC is well positioned to ride the lithium boom as more car manufacturers pour billions into electric vehicle production. Volkswagen alone is buying $56b worth of battery cells for electric vehicles.
Fun fact: The Thacker Pass mine is about a 3 hour drive from the Tesla Gigafactory.
What the risks are:
The most serious risk for Lithium Americas is the fall of lithium prices.
Much of Lithium Americas' future profit relies on the price of lithium, meaning that a hard fall in lithium prices could seriously eat away at profits.
Some of the most bearish lithium price forecasts, like those from Morgan Stanley, put lithium carbonate at $7,200 per tonne in 2025, anticipating that supply will continue to outpace demand.