When you take a cursory look at the narrative for Skillz (NYSE:SKLZ), almost everything screams a buy. Indeed, SKLZ stock handsomely rewarded early bird stakeholders, jumping by nearly 4X from the beginning of November last year till its peak close in early February. Yet from there, it’s been a disaster, only mitigated modestly by dead cat bounces.
What in the heck is going on? As you know, Skillz is a mobile gaming platform. Just participating in this industry alone is enough to garner investor interest. According to a recent market research report by Technavio, the “mobile gaming market is projected to grow by USD 63.66 billion, at a CAGR of 13% during 2021-2025.”
That’s serious money. Even more compelling for SKLZ stock, the underlying company seeks to revolution this video game subsegment through mass-scale outreach and integration. While esports has grown to become a pop culture phenomenon, only a fraction of gamers and developers earn livable income.
Essentially, the Skillz platform democratizes mobile gaming by allowing game developers to convert their digital content into esports competitions. From there, individual gamers can join in on the fun, allowing them to enjoy fresh content and possibly earn money from these digital tournaments. Skillz offers a win-win proposition across the board — except it seems for investors.
From the February peak, SKLZ stock hemorrhaged nearly 63%. It was much worse on Apr. 20, when shares found themselves down more than 71% from the zenith. The thing is, Skillz brought home some encouraging numbers for the first quarter of 2021 earnings report that doesn’t seem to justify the pessimism.
As our own Tezcan Gecgil explained, “Revenue was $84 million, an increase of 92% year-over-year (YoY). Its paying monthly active users (MAUs) increased by 81% YoY.” Yet Skillz shares have disappointed since the earnings release.
SPAC Fever Claims Another Victim in SKLZ Stock
Now, there’s one component that imposes a dark cloud over the Q1 results and that’s net income or the lack thereof. Gecgil notes that a net loss of $53.6 million “overshadowed” revenue growth, particularly because it “was triple the loss of $15 million in the prior-year quarter.”
Of course, that’s not a great look for SKLZ stock. Back in Q1 2020, the world was seemingly staring at an apocalypse. One year later, Skillz should have comprehensively benefited from the temporary destruction of in-person entertainment venues, translating to increased market share for video gaming platforms.
Still, the paying MAUs must have been worth something to the bulls. So again, it begs the question, what the heck is going on with SKLZ stock?
While the company has arguably produced net encouraging results, one dark horse remains how it went public. Prior to its reverse merger, SKLZ stock represented equity in a special purpose acquisition company or SPAC. Unfortunately, SPACs have had a terrible time in the market thus far.
That’s according to the Wall Street Journal, which warned about SPACs’ poor track record — near the end of 2020. In its November article, the WSJ warned that the nature of SPACs allowed their sponsors to basically hide some details that would otherwise get caught in a traditional initial public offering process.
In part, the report stated, “Startups going public through SPACs can make rosy projections about future results with less risk of facing lawsuits than they would if disclosing those figures in a traditional IPO.”
Joseph Grundfest, a law professor at Stanford University and former Securities and Exchange Commission commissioner, was even more blunt, noting that “It’s a perfectly legal regulatory arbitrage.”
Put another way, sophisticated financial insiders sucked the meat out of this bone.
A Dance with the Devil
To be fair, SKLZ stock isn’t just falling because of its SPAC origin. As I mentioned, the underlying company posted some eyebrow-raising figures in addition to the encouraging sales and MAU growth metrics. But it’s also fair to say that you can’t take the SPAC element out of the picture.
And while I can’t prove it, I’m almost certain that millions of unsophisticated investors jumped aboard SKLZ stock when it was a SPAC, just because it was a SPAC. Now that these folks realize that they’ve been taken advantage of by sophisticated Wall Street fat cats, they might be done with SKLZ.
That could prove to be the tragic Catch-22 of SPACs. Many of these startup enterprises wouldn’t sniff an IPO without these blank-check firms. But the nuances of SPACs favor the well-heeled and the well-trained over the naïve. While that’s true for any investment dynamic, SPACs gained notoriety over the trailing year for their dazzling promises.
Today, we’re starting to see just how empty many such promises were. And the victims don’t just include shareholders but the startups that courted them.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.