Happy 2021! We somehow made it through one of the worst years on record. Let’s start 2021 by making some money.
Please note: I have positions in both stocks I am about to mention. That means that even with my massive big-brain (Check out how well EVK has done, since I recommended them on October 15th of last year.), you should do your own due diligence on both picks.
With that out of the way, let’s get to it.
Pick #1: $SKLZ – Skillz (Skillz to pay the bills! You’ll see why)
What they do: Skillz is a mobile gaming platform that allows mobile game users to compete with each cash and/or prizes. Skillz does NOT actually develop the games on their platform, leaving that to game developers. (A good thing I’d argue, as this lowers their cost, and keeps their focus squarely on monetizing the games on their platform) Developers simply host their game on the Skillz platform, players compete with each other one-on-one and in tournaments for cash, and part of that overall cash pool is pocketed by both the developer and Skillz.
Why it is groundbreaking/Why it works: Think about the last sentence of the last paragraph. As mentioned, Skillz takes a little money off the top, no matter the outcome of the competition. In gambling terms, we call this “vig,” and vig is part of the reason why the Vegas Strip doesn’t exactly look like downtown Mogadishu. This, is a winning concept.
What Skillz does is also a winning concept because it eliminates things that mobile users hate. By competing for money, Skillz eliminates all advertising on games hosted on their platform. Users like this. Users also like the ability to compete, a fact that is highlighted by the fact that players on average spend 63 minutes a day, playing games on the platform, a number that is higher than the average person spends per day watching shows on Netflix, and about two times the industry average for mobile games.
Skillz also hosts 5 million tournaments a day. 1.5 million of those tournaments are paid entry. There are 40 million users, among which 2.7 million are active, which is up 69% from 2019 when they had 1.6 million active users, and up 338% from the monthly active user base in 2018. There is plenty of room to grow as well, as according to Hubspot, there are 2.2 billion mobile game users. Furthermore, 33% of all mobile application downloads are related to gaming. This accounts for 74% of all consumer expenditures at Google Play and Apple’s App Store, and the growth in mobile gaming is expected to continue to show faster revenue growth than the PC gaming market. Between 25 to 30% of all international mobile users, are said to play mobile games, which is nice, because Skillz already has plans to go international as well. If Skillz gains even a little penetration overall, and in the international market, where they believe the market is growing four times faster than it is in North America, they could very well skyrocket.
Skillz red-flags: No company is without risk, and that certainly applies to this one, a rapidly growing company that is not making money is always a risk, but a few other things stand out.
Problem #1: Sales and marketing costs are higher than revenue for the first nine months of 2020, vs 2019, with the 2020 on the left.
| Revenue | | | 162,392 | $ | 85,126 | ||
| Costs and expenses | | | | | | | |
| Cost of revenue | | | 8,806 | | | 3,835 | |
| Research and development | | | 13,253 | | | 7,803 | |
| Sales and marketing | | | 172,381 | | | 77,942 | |
| General and administrative | | | 24,336 | | | 11,991 | |
| Total costs and expenses | | | 218,776 | | | 101,571 | |
| Loss from operations | | | (56,384) | | | (16,445) | |
| Interest expense, net | | | (1,297) | | | (2,127) | |
| Other income (expense), net | | | (20,749) | | | 3,653 | |
| Loss before income taxes | | | (78,430) | | | (14,919) |
So even among growth companies, and companies that like Skillz, increase their loss from operation in their first few years, I have seen very few companies that pay more to advertise their services, than get back in terms of revenue. This is indeed concerning, and indicative of a company that my not yet be putting their marketing dollars to good use.
Below is how Skillz describes their increased marketing costs, for 2020, compared to 2019:
Sales and marketing costs increased by $94.4 million or 121%, to $172.4 million in the nine months ended September 30, 2020 from $77.9 million in the nine months ended September 30, 2019. The increase was attributable primarily to a 125% increase in spend to acquire new paying users and a 89% increase in engagement marketing spend. Engagement marketing as a percentage of revenue decreased to 41% in the nine months ended September 30, 2020 from 42% in the nine months ended September 30, 2019.
Meanwhile, revenue increase only 91% in the first nine months of 2020. I say only because when company spending goes up 125% in terms of the effort spent to acquire new players, but revenue only increases 91% from those effort, it is clear that marketing efforts and perhaps cost control, needs to be better managed.
As one point of clarity, which makes things slightly better. Skillz in their most recent quarterly report, list rent and salary under “sales and marketing” costs. It still is an issue.
Problem #2: The vast majority of gamers on the Skillz platform are not actually playing games for money. They actually aren’t yet even engaged in the activity that Skillz is built for!
To me, this is a huge red-flag, and yet one that can change. Still, let’s talk about the problem with how things stand.
As I wrote up, just here, and straight from the horses mouth, of the 5 million tournaments Skillz hosts daily, 1.5 million are paid entry tournaments, meaning that 70% of tournament users are not actually playing for money. Even as they gain a higher and higher number of users annually, Skillz likely will not be successful unless they improve upon that number, to a high degree.
More below on this problem from Skillz’s prospectus, and interestingly, something they did not list in terms of risk factors…
In 2019, only 10% of our MAUs (Monthly Average Users) enter into paid contests. We plan to monetize the remaining 90% through non-intrusive, low friction advertisements, virtual goods, or brand-sponsored prizes that will generate new economic opportunities for us and enable more developers to succeed. Introducing non-intrusive, low friction advertisements would provide more developers a way of monetizing user engagement on the platform and we believe advertisements will be even more effective for games on our platform given the evergreen nature of competitive contests and user engagement patterns.
Not great…
From that same prospectus, three games account for 79% of revenue. One of those games is a slight variants of solitaire, one game is a variant of bingo, and the last game is a variant of blackjack. At first glance, these don’t appear to be natural games to get the juices flowing, and a natural fit with a skills based competition for money, they just don’t. These are games that at first glance, appeal to a older generation. Skillz has also described being a place where players can stream their matches, something which the company also believes will also be useful in helping lead people to their platform. I would argue that for now, Blitz 21 is the only game that I could actually see watching people compete at, and even this game has nowhere near the streaming potential of the type of shooter/action adventure games that gamers typically watch in high numbers.
Skillz is however trying to get higher excitement games, like first-person shooters, on their platform, something that would likely skew younger. Something I also believe, would help lead to a higher amount of active users, who enter paid tournaments.
I believe they will get there.
Pick #2: Profound Medical ($PROF)
What they do: Profound Medical is a Canadian medical company that has developed a novel way to treat prostate diseases, in one setting, and without incision, or radiation.
Why they are groundbreaking: This medical company has developed a novel way to treat prostate diseases, in one setting, and without incision, or radiation. (Nuff said!)
This is an absolute huge market, and as you’ll read, Profound has something that differentiates them from all prostate related treatments, but let’s first talk about market size.
In the United States where Profound operates, (They also operate in Canada and German, and have plans for further expansion, especially in Europe) over 175,000 people are diagnosed annually with prostate cancer. Over three million men are currently diagnosed, and living with prostate cancer. While typically less serious, an enlarged prostate, or as it is officially known, Benign Prostatic Hyperplasia (BPH) can lead to kidney problems and cause the flow of urine out of the bladder to be blocked. 10 million men live with this condition, with over 300,000 surgeries each year.
I do not have the scientific background to even try to attempt to explain how Profound’s machine works, but I can tell you that the machine performs direction ultrasounds, can be customized for the person getting the surgery, depending on the size of the bladder, and provides temperature feedback on the person getting the surgery and real time imaging. (A better description can be found on the Profound website.)
While all of this is admittedly fascinating, the more important thing is to understand just how this type of surgery makes life better for everyone.
For the patient, the surgery is done in one setting, and allows for the possibility that one surgery will be all that is needed, which is anything but the norm. Surgery using Profound’s Tulsa-Pro also protects the urethra and prostate while surgery is being performed. One might infer that this is why men who get surgery from this machine, most often do NOT get the side-affects, associated with most enlarged prostate, or prostate cancer surgeries.
Among the 115 men tested using the Tulsa-Pro, only one man had any new onset of Erectile Disfunction between 1 and 2 years after surgery. There will also no serious cases of ED, and all men reporter improvement in erectile function after two years, wherein prior to the study, 17% of men reported such issues.
There will also zero cases of rectal injuries, or Grade 4 adverse events, as well as zero new cases of urinary incontinence issues among all the men tested, during the first to second year, post-surgery. Among all men studied, only 1% had any urinary issues.
These results were produced, after all men 115 studied prior to surgery, had urinary and ED issues.
Besides from showing a superior safety standard, the results of the actual surgery was equally remarkable. According to Profound, “median prostate volume decreased 91% from 37 cc to 3 cc.”
Besides from reducing the size of the prostate, Profound’s Tulsa-Pro (Transurethral Ultrasound Ablation) machine was found to reduce Prostate Specific Antigen’s (PSA) by 91%. PSA is found in the blood. A high PSA number can indicate the possibility of prostate cancer, and thus when PSA is reduced, the risk of Prostate Cancer is much lower.
So this is pretty much a no-brainer, right? In summary, Profound has developed a machine that is safer than the competition, makes the patient and importantly the package he is holding down their, much more comfortable than the competition, is quicker than the competition, as one surgery is often all that is needed, and right now has been shown to be more effective than the competition.
But that is not all! There is one final bow we can tie on this absolute gem of an offering! Profound also added the prestigious Mayo Clinic in Florida, to the six sights now that currently offer the procedure. In their latest earnings call, Profound CEO Arun Menawat also said that a number of new sites are currently under contract, and this already is a significantly increase from the two sites that Profound had in the United States, at the end of the 2nd quarter, in 2020. All this comes in an environment in which Menawat acknowledged that Covid had slowed their expected growth. It certainly didn’t stop Profound’s growth, which should tell you something!
For the 3-month period ended September 30, 2020, the company had $3 million in revenue, an increase of 337% from $682,000 in the third quarter of 2019. For the first nine months of the year, revenue also increased over 200%. The company also now has much more money at their disposal to handle operational costs and expansion. From the start of 2019 to the third quarter of 2020, Profound increased their cash by a remarkable, 574 percent! They now hold over 110 million in cash.
Profound is growing their U.S. sales force, and engaged in even more studies to show the effectiveness and safety of their Tulsa system. The eggs are not all in one basket either, Profound has also created a machine that they believe will be an effective and painless treatment for uterine fibroids, without incision.
Risk factors:
I see a lot fewer here than for Skillz, but some do exact. Let’s cover them briefly and rap it up.
- The company is still not profitable: Net loss increased from 15,040,724 in the first nine months of 2019, to 19,091,516 in the first nine months of 2020. For the quarter, net loss also increased by about 25% compared to the same quarter in 2019. I’d argue we are in the early innings of this thing, but there is nothing to proves to us that Profound will eventually be profitable.
- Reimbursement issues have not yet been cleared: Profound’s CEO explained this on a recent earning call, and many people who decide to get the surgery will have to pay for it out-of-pocket. The cost is significant. I believe that many still will, and I’d also expect that some clarity on this cost may occur in the future as the efficiency and safety of the surgery is hopefully, further demonstrated, and more surgeries are carried out.
The True Pariah 