Skillz (NYSE:SKLZ) is a love-it or hate-it stock. A young speculator can love SKLZ stock for the story, for its first quarter report, or for the fact that Cathie Wood’s ARK Innovation ETF (NYSEARCA:ARKK) has been loading up on it.
They also might hate Skillz for its history, the holes in that Q1 report, or the bears who have been betting against it.
It’s a classic Wall Street story in which the fundamentals are lost behind a swirl of blind bets, claims and counter claims.
I won’t be playing this game. I’m an aging boomer concerned with capital preservation. The question is, might I recommend it to my 30-year old son or 20-year-old me?
Small Investors Rode SKLZ Stock Down
Skillz is a game platform. It lets developers create online card games, board games, shooter games and adventure games. The idea is that companies can “gamify” any intellectual property, put it on an online platform, and make money from it with cash prizes and entry fees.
The company became controversial after Flying Eagle Acquisition, which had previously taken DraftKings (NASDAQ:DKNG) public, made SKLZ its second SPAC target in September. The deal, consummated in December, brought Skillz’ cash balance to over $600 million by March. It burned $53 million during the quarter while growing revenue 81% year-over-year.
Before the numbers came out on May 4, however, SKLZ stock had already taken small investors for a ride. Shares rose to nearly $44 in mid-February, then came crashing to Earth. On June 1 they opened at about $17.40, a market cap of $6.7 billion on a revenue run rate of $320 million a year.
Cathie Wood Ignored the Bears
The fall came on the heels of reports from short sellers. WolfPack Research called Skillz’ purported partnership with the National Football League (NFL) a pump-and-dump scheme. Eagle Eye Research called Skillz’ financial reporting into question.
Meanwhile, Wood saw SKLZ stock fall and pounced on it. This was enough for our Will Ashworth to recommend Skillz a few weeks ago. Shares bounced off a low of $13 and have been holding up since. Ashworth’s timing looks good.
Our Luke Lango also recommended SKLZ stock after that March quarter earnings report. In addition to getting the NFL interested, the company is also growing in India, he wrote. He likes the concept of mobile, real-money e-sports and believes the stock will quickly bounce back. Thomas Niel also believes the bull case still holds, that criticism is overdone and that Ark Investments’ Wood is playing this right.
The Bottom Line
A friend who got into e-sports over a decade ago showed me that sport franchises are often led by dumb, lazy people who expect money without effort. Unless there is someone inside the NFL working hard on this, I wouldn’t expect anything to come from it. Previous Skillz deals with basketball teams haven’t made the cash register ring or done much for SKLZ stock.
Skillz is a young man’s game, a young man’s company and a young man’s stock. It’s built on the same foundation as DraftKings, that being young men like to throw their money around. I find that questionable.
Other InvestorPlace colleagues, notably Tezcan Gegcil and Josh Enomoto, have looked at those March numbers and recommended investors hold off. I wouldn’t pay 20 times expected revenue for anything, either.
But if you’re a young speculator, and if you’ve tried some of the games, seen how they work and gotten value from them, you might take a flyer on it.
On the date of publication, Dana Blankenhorn 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.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.