Skillz (NYSE:SKLZ), the mobile online esports tournaments company, is likely to outperform analysts’ expectations with its Q1 earnings release on May 4. That will likely push the stock higher as a result. My assessment is that SKLZ stock is worth at least $20.85, or 19% higher than Friday’s price (April 30) of $17.52.
In my previous article on April 8, I suggested that the stock was worth at least $20.77. So I have raised my target price slightly. SKLZ stock briefly exceeded that price on April 26. That was when SKLZ stock had a short-term peak of $21.16.
But as of April 30, it was down again to $17.52. Moreover, the stock is down from its March 15 high of $31.45 per share. I suspect there is a good chance that it could get closer to that high again.
Here’s why the company should do much better than expected.
Forecasts for Q1 and Valuation
The company itself forecasts that its revenue for Q1 will be $80, significantly higher than analysts’ expectations of between $72.2 to $79.6 million. This is pretty rare for a company to do. I hardly ever see a technology company provide both analysts’ forecast and its own projections for key metrics. This is a show of confidence.
However, the other metrics on the chart reflect average or mid-point performance. Still, the company projects negative $37 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). According to Skillz, analysts are predicting a range from -$21.2 million to -$24.5 million. So, in terms of profitability, Skillz projects worse performance.
I don’t think that matters right now. SKLZ stock is being valued mainly on a price-to-sales (P/S) basis. For example, right now analysts foresee revenue for 2022 will hit $551 million, or 49% above forecast revenue of $369.75 for 2021. That puts SKLZ stock on a forward P/S ratio of just 12.6 times.
And remember the 2021 sales forecast is also 60% higher than the $230 million in 2020 revenue. So over the next two years, sales will more than double from $230 million to $551 million (+140%). If this occurs, the stock is well worth at least 15 times revenue.
That would put its valuation at $8.26 billion (i.e., 15 x $551 million for 2022 sales). This is 19% above its present market value of $6.94 billion. In other words, Skillz stock is worth at least $20.85 per share (i.e. 1.19 x Friday’s closing price of $17.52).
What To Do With SKLZ Stock
If Skillz comes out with better than forecast earnings for Q1 on May 4, watch out. The stock could begin another new climb toward its former peaks.
Recently Catherine Wood’s Ark Investment Management increased its stake in SKLZ stock. Moreover, as Seeking Alpha reported, Ark Invest commented on recent negative accounting and short-seller reports on Skillz. Ark Invest said these claims were “either exaggerated or incorrect.” It believes these claims were based on “a misunderstanding of the company.”
And it puts its money where its mouth was. The exchanged-traded fund (ETF) manager bought 3,800 more shares of SKLZ stock.
However, some negative news on the company’s CEO, Andrew Paradise, also came out recently. On April 27 news reports came out that his brother was suing him over ownership of a 5% stake in the company.
That kind of drama isn’t good for a stock. Yet analysts still seem fairly positive about the outlook for SKLZ stock. For example, TipRanks indicates that 6 analysts who have written on the stock in the last 3 months have an average price target of $29. This represents a potential 65% gain for investors.
The same is true with Yahoo! Finance. They report that 7 analysts have an average target of $28.71, or 63.8% higher. So analysts on Wall Street are still generally very positive on SKLZ stock. Finally, my target price of $20.85, based on 15 times projected 2022 sales, does not seem unreasonable.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
