Skillz vs. Gravity: Which Gaming Stock is a Better Buy?

Headquartered in Seoul, South Korea, Gravity Co., Ltd. (GRVY) develops, publishes, and distributes online games internationally. It offers multiplayer online role-playing games that include Ragnarok Online, Requiem, and Dragonica. In comparison, Skillz Inc. (SKLZ) primarily develops and supports a proprietary online-hosted technology platform that enables independent game developers to host tournaments and provide competitive gaming activity to end-users worldwide.

The gaming industry saw a  surge in its consumer base last year because people spent much more time at home due to COVID-19 pandemic lockdown requirements. And even though the ongoing semiconductor shortage and consumer shift in focus to outdoor activities could affect the gaming industry in the near term, increasing demand for online, mobile, and cloud gaming should drive long-term growth. According to a Fortune Business Insights report, the global gaming market is expected to grow at a 13.2% CAGR between 2021 - 2028. Consequently, both GRVY and SKLZ should benefit.

But while GRVY’s stock has gained 5.4% in price over the past three months,  SKLZ lost value. However, SKLZ’s 2.5% gains over the past year are higher than GRVY’s negative returns. Furthermore, SKLZ is the clear winner with 54% price gains versus GRVY’s 15.6% returns in terms of their past month’s performance.

Click here to check out our Video Game Industry Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 5, 2021, GRVY announced that it revealed the complete list of games for G-STAR 2021 and opened an official website. It plans to open large-scale booths at G-STAR 2021 and present 13 titles, including Ragnarok IP-based games and coming launchings from the second half of 2021 and  2022.

On October 23, 2021, Kaskela Law LLC announced that it is investigating SKLZ on concerns about whether the company's board of directors breached their fiduciary duties or violated securities laws in connection with its alleged dissemination of misleading or inaccurate company information..

Recent Financial Results

GRVY’s revenue decreased 5.5% year-over-year to $73.97 million for its fiscal second quarter, ended June 30, 2021. However, its operating profit grew 17.4% year-over-year to $16.95 million, while its net profit increased 13.6% to $13.11 million. Also, the company’s EPS came in at $1.88, up 12.8% year-over-year.

SKLZ’s revenues increased 70% year-over-year to $102.07 million for its  fiscal third quarter ended September 30, 2021. The company’s gross profit grew 66% year-over-year to $94.40 million, while its net income came in at $50.78 million, versus a $42.85 million loss in the prior-year quarter. Also, its EPS was  $0.16 compared to a $0.14 loss per share in the year-ago period.

Profitability

GRVY’s trailing-12-month revenue is 1.12 times SKLZ’s. GRVY is also more profitable, with EBITDA  and net income margins of 25.68% and 18.17%, respectively, compared to SKLZ’s negative returns.

Furthermore, GRVY’s 44.04%, 27.69%, and 38.47% respective ROE, ROA, and ROTC  compare to SKLZ’s negative values.

Valuation

In terms of trailing-12-month EV/S, SKLZ is currently trading at 13.09x, which is 821.8% higher than GRVY’s 1.42x. And SKLZ’s 13.10x trailing-12-month P/S ratio  is 600.5% higher than GRVY’s 1.87x.

So, GRVY is relatively affordable here.

POWR Ratings

GRVY has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In comparison, SKLZ has an overall F rating, which translates to a Strong Sell. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

GRVY has an A grade for Value, consistent with its 1.42x trailing-12-month EV/S, which is 46.5% lower than the 2.65x industry. However, SKLZ has a D grade for Value, which is in sync with its 13.09x trailing-12-month EV/S , which is 394.5% higher than the 2.65x industry average.

In addition, GRVY has a B grade for Quality. This is justified given GRVY's 27.50% trailing-12-month ROTA, which is 817.8% higher than the 3% industry average. In comparison SKLZ has a Quality grade of D, which is in sync with its negative trailing-12-month ROTA compared to the 3% industry average.

Of the 23 stocks in the B-rated Entertainment - Toys & Video Games industry, GRVY is ranked #5 while SKLZ is ranked last.

Beyond what I have stated above, we have also rated the stocks for Growth, Stability, Sentiment, and Momentum. Click here to view all the GRVY ratings. Also, get all the SKLZ ratings here.

The Winner

The gaming industry is expected to grow in the near term despite the reopening of the economy and shifting focus on outdoor activities. While GRVY and SKLZ are expected to benefit from the industry tailwinds, we think it is better to bet on GRVY now because of its lower valuation and higher profit margin.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Entertainment - Toys & Video Games industry here.

Click here to check out our Video Game Industry Report for 2021

GRVY shares were trading at $112.39 per share on Thursday afternoon, up $8.87 (+8.57%). Year-to-date, GRVY has declined -37.82%, versus a 25.39% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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