Thesis
Skillz Inc. (SKLZ) is a growing mobile, e-sports platform, that became a poster child for aggressive growth investing as it entered the public market in late 2020. During a period of blind faith in any business model that could benefit from the stay-at-home economy the Covid-19 pandemic imposed on the world, Skillz received a hefty IPO valuation and rallied even higher shortly after. With the current state of the market being completely different and the company showing shaky growth prospects and profitability currently out-of-sight, many investors worry that perhaps Skillz’s promise will be a short-lived one.
Stock Price Downfall
Skillz has found itself in the eye of the storm, grounding the vast majority of high-flying growth stocks that the Covid-19 pandemic brought a lot of attention to. After a much-anticipated IPO in late 2020, the stock embarked on an impressive, yet short-lived run-up, followed by an aggressive drop in late 2021, erasing over 85% of the company’s market capitalization. For a stock that once traded over $40 and was introduced in the stock market at a $22.7 stock price, it seems clear that analysts are worried about the company’s survival. Skillz is also a heavily shorted stock, with a 19.6% short interest. Skillz’s wild stock price ride since late 2020 is shown in the chart below.
Recent Developments and Q4 results
In its most recent Q4 2021 earnings report, Skillz missed on revenue ($108.85M misses by $5.2M) and net income (GAAP EPS of -$0.25 misses by $0.10) estimates. Despite strong YoY growth, with revenue increasing 61% YoY and gross profits 56%, the failure to meet expectations is sending the stock in a 30% downfall today, signaling that perhaps in the coming days shareholders will face more losses. Even though Paying Monthly Active Users (PMAU) increased 56% year-over-year to 0.61 million, primarily due to excessive marketing spending, the Average Revenue Per Paying User (ARPPU) was up just 3% year-over-year to $59.
It could also be said that mobile games rarely attract large numbers of hardcore gamers that would stay on the platform on a longer-term basis, constantly engaging. Even though the get-paid-for-competing business model sounds enticing, it is becoming increasingly hard to see it working over the long run, especially if the competition intensifies.
On a more bullish note, Skillz still maintains a large cash balance of over $500 million in its balance sheet that can be used towards inviting more popular games to join the platform. The company’s planned international expansion could also boost growth prospects. Skillz has already launched its testing phase in India, a heavily populated market that offers huge growth potential.
Industry Growth Prospects Deliver Good News
The mobile gaming industry is expected to expand significantly over the coming decade, providing another tailwind for the business. According to Extras:
In 2020, smartphone games accounted for almost 50 percent of video gaming revenue worldwide, and as mobile penetration rates and smartphone usage continue to accelerate on a global scale, mobile games revenue is on track to surpass the 100 billion-dollar-mark by 2023.
More research suggests that by 2026 the global mobile gaming industry is expected to grow at a 12.3% CAGR, with the Asia-Pacific region leading the expansion. As key drivers, the same research names advancing smartphone hardware capabilities, wider use of 5G networks and the inexpensive availability of the smartphone as a portable console. Especially when considering the extremely advanced capabilities of iPhone processors and graphic units, as well as the enhancements on cell phone screen displays, one could argue that the iPhone is on track to sideline more traditional portable gaming platforms. Of course, smartphones offered by other brands are bound to follow, as they are received as inexpensive alternatives to Apple’s offerings.
Valuation
For a stock that once was valued extremely aggressively, Skillz currently appears inexpensive. At a $1.1 billion market cap (as of the time this article is written), the company trades at less than 34x 2021 (expected) sales and less than 3x 2022 forward sales. In the coming days, judging by the initial reaction towards the Q4 earnings, it is safe to say that Skillz’s valuation metrics are likely to further decrease. It is important to note, however, that assigning a fair value on a stock like Skillz is extremely hard, given the uncertainty around revenue growth, the lack of profitability, and the overall shaky business foundations the stock seems to be standing on. The short-lived history of financial performance, since Skillz became public in 2020, doesn’t help either.
Final Thoughts
As Skillz failed to deliver a strong fourth quarter, which could be the factor that allowed the stock some breathing room after the devastation of the past several months, more losses are in sight. The company has to reestablish a clear path toward sustainable profitability, which currently seems to be slipping away, with investors abandoning hope. For my personal investing preferences despite what looks like an oversold and perhaps undervalued stock, Skillz’s risk profile raises too many red flags and leads me to avoid the stock altogether, at least for the time being.