The rise of smartphones and other mobile devices has represented a massive tailwind for gaming companies. While digital games were first limited to consoles and then desktops, nowadays an individual with access to a smartphone or a tablet and an internet connection has the capacity to spend endless hours playing online games. And some do.

There is now also growing innovation in the legacy console-gaming space. Several gaming publishers now aim to get traction across verticals, which should lead to higher customer engagement and revenue growth. The COVID-19 pandemic also proved beneficial to these companies because entertainment options were limited.

Several gaming companies, including Zynga (ZNGA - Get Rating) and Skillz (SKLZ - Get Rating), went public over the last decade and have experienced consistent growth in top-line due to an expanding addressable market. But which between the two stocks should one buy at current prices?

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

Zynga has underperformed the market since its IPO

San Francisco’s ZNGA is one of the few gaming companies that has failed to deliver in terms of shareholder returns. The company went public in December 2011 and has since lost 22.5% in market value.

But the company has gained momentum in recent years, and its stock is up 161% in price since October 2016.

The mobile gaming giant has deployed resources in the past to successfully acquire game development companies to drive revenue higher. It has also delivered content updates for popular franchises, resulting in strong customer engagement.

In its Q2 results, Zynga disclosed that it expects its bookings for 2021 to be 3% lower than the company’s previous forecast. Further, Zynga’s ad-revenue is likely to be impacted by privacy changes made by mobile platforms, including Android and iOS. These factors have meant that ZNGA stock is down 33.4% in price in the last six months.

But Zynga is also trading at a 21.6x forward price-to-earnings multiple, and a 3x price- to-sales multiple, making it extremely undervalued at current levels. Zynga also ended Q2 with over $1.5 billion in cash and continues to report robust cash flow metrics, giving it sufficient flexibility to grow inorganically also.

Skillz is down 73% from all-time highs

A gaming stock that went public in 2020, the shares of Skillz, which is also headquartered in San Francisco, are down 73% from record highs, valuing it at a market cap of $4.7 billion. The company delivers a platform that allows game developers to monetize their content. Here, users pay a fee to enter gaming tournaments and win cash prizes. The game’s developer and Skillz both get a small percentage of the cash prize before it’s distributed to the winner.

According to research reports, players are currently spending twice the time on Skillz versus  other gaming platforms, while developers have also seen their revenue increase at an accelerated pace once they are part of the Skillz ecosystem.

Skillz has increased its sales from $50.77 million in 2018 to $230 million in 2020. And analysts expect its sales to rise by 69.5% to $390 million in 2021 and by 42.5% to $555.7 million in 2021.

The verdict

Skillz stock is significantly overvalued compared to Zynga, but the former is also growing at a much faster pace. Both Zynga and Skillz have grossly underperformed the broader markets in 2021, allowing investors to buy the dip. But I believe Skillz has exciting growth prospects that will allow the company to expand its ecosystem easily, making the stock a better bet right now.

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

ZNGA shares fell $0.03 (-0.40%) in after-hours trading Thursday. Year-to-date, ZNGA has declined -24.62%, versus a 23.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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