Mobile gaming is one sector that has become red-hot. The pandemic has driven incredible demand among various platforms catering to this growth segment of the market. For investors in Skillz Inc. (NYSE:SKLZ) stock, the hope is that this momentum can continue well past the pandemic.
There’s certainly reason to be optimistic in this regard. Recent forecasts suggest the mobile gaming market could carry a CAGR of 13% for the next five years.
Additionally, approximately 50% of all video gaming revenue worldwide is reportedly tied to smartphone gaming.
These sorts of growth statistics are what investors want to see. For companies like Skillz with top-performing games, the hope is that the company will be able to grow even faster than the market rate as Skillz captures market share over time.
Indeed, investors appear to have taken their foot off the gas with respect to the growth estimates applied to SKLZ stock. Since hitting a high of more than $46 per share earlier this year, investors can now pick up SKLZ stock around the $18 level.
Let’s dive into why some investors are getting excited about SKLZ stock at these levels.
Cathie Wood Buying Into SKLZ Stock in a Big Way
High-profile ARK Invest manager Cathie Wood is among the bullish Wall Street investors buying into Skillz in a big way. Indeed, she’s recently announced large stock purchases across a couple of her key funds. Her total holdings of SKLZ stock across all her funds sits at nearly 11 million shares.
It’s important to note that Wood has been increasing her stake in Skillz over time. She remains bullish on this company, and the cheaper it gets, the more she adds. This high-conviction bullish take on SKLZ stock appears to be just one of many in the growth investing space.
Now, Wood is widely considered to be a thought leader among growth investors. Therefore, what she’s buying heavily matters for the average investor.
These recent purchases provide validity to Skillz’s business model. Furthermore, retail investors who may otherwise be skittish regarding the performance of SKLZ stock may be comforted by the fact that Wood is still buying.
In today’s coattail-riding momentum-trading environment, a follow-the-leader approach has worked out quite well. Investors who have bought into various funds run by Wood have seen triple-digit returns over the past year and may be understandably emboldened by her take on Skillz right now.
Risks Exist, So Trade Carefully
The announced buying by Wood his past week appears to be well-timed. These purchases came on the heels of an anonymous short-seller report tweeted by Eagle Eye Research on Apr. 19 suggests there are some major problems with Skillz’s business model.
This short report dives into some of the key problems with Skillz’s business model. I covered these in a recent piece and would recommend investors have a read. But, to summarize, here are the following key points:
- Skillz’s business model is fragile, with high churn rates and suspect unit economics. That is, attracting new users is a high-cost endeavor, while the ads that users watch pay out little in revenue.
- The company’s “bonus cash” awards allow for a round-tripping of revenues.
- Eagle Eye estimates that revenues were actually 29%-47% of the reported revenues by Skillz over the past three years.
Now, the extent to which these purported discrepancies are true or not is up to the individual investor to determine. However, these facts do cast doubt on the ultimate profitability and revenue growth trajectory of Skillz relative to its competitors.
Skillz operates in a high-growth segment of the market with the tremendous potential to grow its suite of competitive mobile games. However, investors need to ensure they do their due diligence with this stock, as I’m sure Wood has.
I’ve yet to see commentary from Wood refuting the claims made by this particular short-seller. That said, her buying indicates she’s not at all perturbed by what’s in this report.
Wood’s continued buying of SKLZ stock immediately following a short-seller report is encouraging for those holding a position in Skillz today.
That said, I think investors could view this move in two different ways.
On the one hand, Wood could have increased her due diligence efforts. She could have asked her analyst team to drop everything and dive into these allegations and see what’s true and what’s not before increasing her bets on this growth play.
On the other hand, some analysts believe Wood’s team lacks the experience and due diligence rigor to do so. According to Morningstar analyst Robby Greengold, “ARK’s team of inexperienced analysts, go-with-your-gut risk management approach, and bloated asset base raise doubts about whether this fund’s outstanding historical results can continue.”
In other words, Wood could be averaging down in a move to save face. She knows that when she buys a stock, there will be a follow-on trade. Accordingly, if we see some selling from Wood over the intermediate term, this may be an indication of the latter.
I remain skeptical of Wood’s performance of late, in the sense that I think hyper-growth stocks are incredibly overvalued today. Risks are generally not being priced in as they should. When the market reverts toward its longer-term mean with respect to valuations (and it will), these stocks will be the ones with the most downside. Volatility works in both directions.
Again, investors need to do their homework with SKLZ stock. I think it’s not as much of a slam dunk as Cathie Wood makes it out to be.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.