The Bear Thesis Against Skillz Stock Is Compelling at This Time

Shares of online gaming platform Skillz (NYSE:SKLZ) took a beating after posting its first quarter earnings. Despite its impressive revenue growth, the company remained overshadowed by its mounting losses. Nevertheless, the bulls feel that the platform is disruptive, with its unique business model that has a massive growth runway ahead. However, SKLZ stock has a lot to prove before it can narrow down its bear case.

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It had been a rocky few months for Skillz since its IPO back in December last year. As a result, 3-month returns for SKLZ stock are at a negative 65%. Valuing a business such as Skillz is tough to begin with, due to the distinctiveness of its business model. Moreover, it’s easy to misunderstand the business and therefore assign inaccurate price targets. The multiple short reports targeting the company haven’t helped either.

The bears believe that the stock is exceptionally pricey due to stock bonuses, secondary offerings and the hype surrounding the business. However, the industry is relatively nascent, and therefore the underlying metrics hold relatively lower importance. All in all, though, Skillz has its work cut out in expanding its revenue base, curbing losses and reducing its dependency on just a few games.

With that being said, let’s peer into the company’s recent activity and the elements of its bull and bear case.

SKLZ Stock: Rapidly Growing Revenues

Skillz’s reported its first-quarter results where revenues surged 92% year-over-year to $83.7 million. In addition, its paying monthly active users increased by a healthy 81% year-over-year to 467,000 in the first quarter. Moreover, the company claims that the monthly active users (MAU) ratio of 17% is eight times higher than the industry average.  Additionally, its gross merchandise volume (GMV) shot up 85% on a year-over-year basis to $566.6 million.

The company expects 63% revenue growth in 2021, a 4% increment over its previous guidance. The higher guidance is attributable to the growth of its Android audience, its new NFL partnership, and its expansion into new gaming genres.

Furthermore, Apple’s (NASDAQ:AAPL) new iOS privacy measures could potentially create more growth opportunities for Skillz. The new update requires users to opt-in to data tracking features and expand the scope of the more profitable in-app transactions instead of targeted ads.

The Bear Case

Despite the growth in its revenues, it’s heavily dependent on three of its flagship titles: Solitaire Cube, 21 Blitz, and Blackout Bingo. These games had collectively generated close to 80% of its revenue in 2020. Skillz hasn’t released how much revenue these hit games have generated in the first quarter, but it said the top developers contributed 42% to the top line.

Another key issue with Skillz is that its total MAU has grown by only 4% year-over-year to 2.7 million in the first quarter.  That accounts for a tiny fraction of the total esports market, which estimates to be over 2.7 billion. Hence, it remains a niche platform for smaller games, as other publishers are looking to launch their multiplayer networks.

At the same time, its user acquisition marketing costs have increased 101% on a year-over-year basis to $54.3 million in the first quarter. It intends to narrow down these costs over time, but it appears that it will probably take a lot more time than expected.

As a result, its net loss has risen from $15.5 million to a whopping $53.6 million. Hence, the stunted growth in MAU and rising user acquisition costs significantly complicates the company’s path to profitability.

The Bottom Line on SKLZ Stock

SKLZ stock is one of the most disruptive investments in a relatively nascent yet propitious esports industry. It continues to expand its revenues rapidly; however, it has failed to improve its MAU by significant margins. Hence, it continues to struggle in turning a profit amid its massive user acquisition costs. Therefore, there is potential with SKLZ stock, but it’s not a buy yet.

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

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 

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