Skillz Stock Is a Falling Knife You Don’t Want to Try and Catch

InvestorPlace’s Luke Lango confidently argued on March 25 that Skillz (NYSE:SKLZ) stock was too cheap to ignore below $20.

kid in front of a computer screen playing video games to represent gaming stocks

Source: Shutterstock

Since hitting an all-time high of $46.30 on Feb. 5, SKLZ stock has lost 66% of its value, one-third of which after my colleague gave it two thumbs up.

With no floor in sight, I think it’s definitely time to call Skillz precisely what it is: A falling knife of epic proportions. 

Is there a bottom? Probably. Although if you bought around $46, my answer likely isn’t comforting. 

What you want to know is whether it will ever get back to $46. Here are my thoughts on the subject. 

SKLZ Stock Jumps to $46

I’d encourage you to reread Lango’s March 25 article. Two things stand out for me.

First, the average revenue per user of games built on Skillz’s tech platform is $6. That’s more than 3x games supported by ads. That’s a huge difference. 

Secondly, the numbers from Q4 2020 were off-the-charts-good. If you follow Netflix (NASDAQ:NFLX), Roku (NASDAQ:ROKU), Pinterest (NYSE:PINS), or any of the other tech companies driven by user or subscriber numbers, you know to look for certain trends. 

In the case of Skillz, the fact that its monthly active users (MAUs) were up 20% in the fourth quarter compared to last year, and the paying monthly active users (pMAUs) was up 121% over last year tells me good things are happening.

So, in Q4 2020, it had 2.4 million MAUs. Of those, 391,000 end-users entered into a paid contest on Skillz’s platform at least once in each of three months in the quarter. That works out to a Paying MAU to MAU ratio of 16.3%, 740 basis points higher than a year earlier. 

The big number will be the sequential growth of the Paying MAU to MAU ratio from Q1 2021 to Q4 2020. If that’s higher, Bob’s your uncle. 

According to the company’s March 25 press release, it expects a Paying MAU to MAU ratio of 17.3%, 100 basis points higher than the quarter prior. If it does this for several quarters in a row, forget $46, SKLZ will be $100. 

But it’s got to keep the momentum. 

Could It Drop Below $10?

Absolutely it could.

Especially when you consider that SKLZ is down nearly 12% over the past five days of trading and around 50% over the past month. Gravity has taken hold and won’t let go.

Now, if you are a risk-taker, that’s excellent news because you’ll be able to buy shares in a company that could dominate the mobile esports technology infrastructure market for less than investors paid for Flying Eagle Acquisition Corp., the special purpose acquisition company (SPAC) that Skillz merged with to go public. 

That’s a sweet deal. 

The only fly in the ointment is that Skillz continues to lose money. It expects adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of -$37 million on $80 million in revenue in Q1 2021. That’s an EBITDA margin of -46.3%.

Considering it had a gross margin of 95% for all of 2020, it’s tough to see so much go out the door for operating expenses. For every dollar of sales, it spent $1.38 on research and development, sales and marketing, and general and administrative expenses. 

That’s almost three times what it spent in 2019. At some point, it’s got to do more with less. If it doesn’t, trading below $10 will be a mere formality.

Bottom Line

As investments go, I’m torn on Skillz. 

I think the guys behind Flying Eagle — Jeff Sagansky and Harry Sloan — are probably the best or near the top of investors who’ve done multiple SPACs in the past two years. 

That said, my InvestorPlace colleague, Josh Enomoto, made good points recently about the black clouds still hanging over the economy due to Covid-19. Until those disappear, it’s unlikely that a big chunk of the population is going to be too keen about spending money to bet on their game-playing skills. 

So, I can see why Josh is skeptical about buying SKLZ stock.

Now that the cat is out of the bag regarding the first quarter, I’m not sure there’s a catalyst to move it higher. I’d probably wait to see if it falls some more before buying shares. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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