Skillz (NYSE:SKLZ) stock flew higher [Wednesday] after the mobile gaming technology company announced it will be acquiring mobile advertising technology firm Aarki. SKLZ stock rose as much as 30% on the news.

That might seem like a bit of an overreaction from Wall Street.

But it’s not — this is a game-changing development for SKLZ stock.

Why? Because Aarki provides the “missing link” in the Skillz technology platform. That is, Skillz has developed a suite of tools to help developers create mobile games. But what good is developing a mobile game if those games don’t have any visibility and have no players? Advertising is equally important to the success of a mobile game as development. Skillz didn’t have advertising solutions before. Now, with Aarki, Skillz has advertising solutions.

Thus, going forward, Skillz has the tools and technology it needs to turn its niche mobile gaming technology platform into a must-use development and advertising solution for mobile game makers everywhere.

That long-term upside potential simply isn’t priced into SKLZ stock today. Indeed, it won’t be fully priced in until shares hit $40. So, get in, sit back, and wait. The gains for SKLZ stock will keep rolling in over the next few months.

Here’s a deeper look.

SKLZ Stock: A Long-Term Winner

First, let’s make one thing very clear: SKLZ stock is a long-term winner. And it’s a long-term winner for three big reasons:

  1. Mobile gaming is the future.
  2. The mobile gaming market is currently undergoing a massive shift toward mobile esports.
  3. Skillz is optimally positioned to create the technology infrastructure supporting the mobile esports industry.

Point one is easy to understand. Everything’s going mobile these days. Gaming is no exception. About 2.6 billion folks across the globe play mobile games, mostly because they’re accessible, fast and offer great quick-hitter entertainment. These gamers also open their wallets for the games. Mobile games generated $77.2 billion worth of revenues in 2020, up 13.3% year-over-year. This trend of double-digit growth in the mobile gaming industry is expected to persist for the foreseeable future.

Point two is a bit more complex, but still compelling. Despite the huge popularity of and growth in mobile gaming, the economics underlying mobile games are broken. That is, most of these games are “free-to-play,” so they monetize through ads. But consumers don’t click ads on mobile games — and therefore, advertisers don’t spend much money on those ineffective ads. The result? Most mobile games have horrible unit economics, and are actually unprofitable.

The fix is a shift from mobile advertising to mobile esports. In the mobile esports model, mobile apps turn their games into real-money, skills-based competitions, where gamers pay an entry fee into a competition or tournament, and then win prize money if they win that competition. The result is higher engagement, lower acquisition costs, higher revenue per player, and far better unit economics.

Thus, over the next few years, you’ll see mobile gaming explode, mobile app ads disappear, and mobile esports become a ubiquity.

The Leader in Mobile Esports Tech

The last point is the most critical: Skillz is at the epicenter of the mobile esports shift.

The company supplies the mission-critical, technology infrastructure that allows any old competitive, skills-based game, to turn into a mobile esports title with real-money competitions and tournaments.

So… let’s say I’m a mobile developer who made a skills-based card game back in 2015… but that card game has struggled to sell ads over the past few years. I could tap Skillz to integrate my gaming source code with the company’s tech platform to seamlessly turn my card game into a mobile esports platform with real-money wagers and prize tournaments.

Why would I do that?

Because Skillz has a proven track record of meaningfully improving mobile gaming economics. The average revenue per user of games built on the Skillz tech platform hovers above $6, versus less than $2 for ad-based games.

The competitive advantage here is Skillz’ anti-cheat algorithm — and it’s a very big and very durable advantage.

Cheating is unfortunately super common in mobile esports. Therefore, a strong anti-cheat algorithm is the most important piece of any mobile esports game. The strength of an anti-cheat algorithm is determined by the volume and granularity of real-time gaming data that informs it. And, because Skillz is the first mover in this space, the company has amassed the most robust gaming data lake — which the company has turned around to build the industry’s best anti-cheat algorithm.

With the industry’s best anti-cheat algorithm, Skillz is strategically positioned to dominate the mobile esports technology infrastructure market for the foreseeable future.

That, of course, is great news for SKLZ stock.

Aarki Acquisition is the “Missing Link”

The biggest risk to the SKLZ stock bull thesis has historically been very straightforward: If no one plays the games that developers create with Skillz, then the business model will break.

True — and that’s why the Aarki acquisition is a game-changer for Skillz.

Skillz is not an ad-tech company. They’re a gaming tech company. They’ve developed a suite of world-class tools to help developers build mobile esports titles. As far as advertising those games and getting users to play them… well, that’s something Skillz simply didn’t address.

Until now.

Aarki is that “missing link”. This is an ad-tech company. They leverage AI and big data to optimize mobile advertising campaigns. Essentially, that means Aarki creates “smart” advertising campaigns to help increase awareness of mobile apps, and get people to use those apps.

Skillz will integrate that technology into its platform.

Thus, going forward, Skillz has the tools and technology it needs to turn its niche mobile gaming technology platform into a must-use development and advertising solution for mobile game makers everywhere — an all-in-one solution, if you will, that will help Skillz and its game developers take things to the next level.

In other words, Wall Street is not overreacting here. The Aarki acquisition is a game-changing development for SKLZ stock.

Bottom Line on SKLZ Stock

Skillz stock belongs in a basket of high-quality, hypergrowth stocks with a ton of long-term potential that has been beaten and bruised over the past few months as the market has turned its back on early-stage growth companies.

Now is the time to buy these stocks.

These are the companies that are reimagining the digital landscape, as globalization and technological convenience converge. My favorite plays in this space are stocks in social media, esports, advertising, streaming media and iGaming.

Many of these stocks are deeply oversold, with 100%-plus upside potential from current levels. Right now, the tide appears to be turning in their favor.

— Luke Lango

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Source: Investor Place