After listing in December 2020 at $22.70, Skillz (NYSE:SLKZ) stock surged to a high of $46.30 within two months. After a rally of more than 100%, the stock has been on a sustained correction mode. Currently, with SKLZ stock now trading almost 68% lower, at $15, it seems that the correction is overdone and the stock is worth considering at current levels.
Last week, ARK Invest added more than three million shares of Skillz stock to two of its exchange-traded funds. Manager Cathie Wood has a strong, loyal following in the investment community. Her ETFs are focused on high-growth companies with disruptive innovation. Of course, this alone is not the reason to buy the stock. But it seems like smart investors are snapping-up SLKZ stock at current levels.
The purchase was more than just “buy the dip” and likely a case of “pick from the plunge.” Let’s take a look at what’s behind that sharp stock decline.
Dilution Weakened SKLZ Stock
Since March 8, SKLZ stock is down 35.8%. That day, Wolfpack Research released a short report on the company that argued that the company’s “top games appear to be stagnant to declining.” The report asserted that “its revenue projections are farcical.” Ouch!
A few days later, on March 18, Skillz pursued a follow-on public offering of 32,000,000 shares of its Class A common stock. The offering was at $24 per share. This implied meaningful equity dilution. Boom!
SKLZ stock fell as low as $12.45 a share by April 20 before starting a bit of a recovery that flopped. Even coming into last week’s earnings report, it couldn’t catch a break.
Strong Revenue Growth is a Positive
Skillz has been on a high-growth trajectory. For fiscal year 2020, the company reported revenue growth of 92% on a year-on-year basis to $230 million. For the current year, the company has guided for revenue growth of 63% to $375 million.
As of March 2021, the company reported a cash buffer of $613 million. With the subsequent offering, the company seems well financed for the next 24 months.
If top-line growth remains healthy, SLKZ stock is likely to trend higher. It’s worth noting that the company’s stock still trades at 16.5 times 2021 revenue guidance. Even Roblox (NYSE:RBLX) is trading at 25.9x 2021 revenue guidance.
Investors might also worry about the fact that Skillz reported monthly active users of 2.7 million as of Q1 2021. The company’s MAUs have been essentially the same in the last 12 months. However, there are three factors to note.
- Paying monthly active users for Q1 2021 increased by 81% on a year-on-year basis to 467,000,000. Even with MAUs remaining stagnant in the near-term, paying users have surged.
- Average revenue per paying user was $60 for Q1 2021 as compared to $56 for Q1 2020. ARPU has been healthy and as paying users increase, robust ARPU is likely to translate into improvement in key margins.
- The company’s sales and marketing expense for Q1 2021 was $96.3 million as compared to $46.8 million in Q1 2020. With ample cash buffer, the company is likely to remain aggressive in terms of marketing spending.
It’s very likely that this will translate into healthy MAU growth in the coming quarters. On the flip-side, if MAUs continue to disappoint even with higher marketing spending, SKLZ stock can remain depressed.
Another positive for the company is a strong developer ecosystem. In 2016, the company had six games with an annual GMV of more than $1 million. In 2020, the number of games with GMV of over $1 million swelled to 36.
Concluding Thoughts
In Q1 2020, the company expanded its Android footprint. Revenue growth from Android users has been twice as fast as for iOS users. The company also plans to invest in international growth where the total addressable market is $125 billion. With these growth opportunities, Skillz looks attractive at current levels.
I must mention here that for Q1 2021, the company reported adjusted EBITDA loss of $31.1 million. Losses widened on a YoY basis. However, at an early growth stage, I would not be concerned about EBITDA level losses.
I would be worried if the company’s aggressive sales and marketing efforts fail to deliver strong MAU growth. Considering the positives and the risk factors, SKLZ stock does seem oversold. Being cautiously optimistic, some exposure can be considered at current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
