I can appreciate the irony of Skillz (NYSE:SKLZ) being an example of gamification in the stock market. As Nicolas Chahine points out, there is a new breed of traders trying to make their mark. However, that current trading environment makes SKLZ stock more attractive as a short-term trade than a long-term investment.
One reason is that short interest in SKLZ stock is around 30% of the total float. Another reason is the stock price is showing signs of consolidating. Both makes the stock a candidate for a short squeeze. This was a theory posed by my InvestorPlace colleague Faisal Humayun in early June.
That’s a shame. Because with all the dubious SPAC stocks that have entered the market since 2020, Skillz stands out. The company isn’t profitable, but there’s a believable path to profitability. However, at this point, it’s going to be hard to find a fair value for SKLZ stock.
A Perfect Fit For the Gig Economy
Some of the arguments against Skillz seems to be a function of criticizing what we fail to understand. Skillz has a disruptive business model that addresses an issue that game developers experience in the traditional gaming ecosystem. It boils down to the old philosophical trope of if a tree falls in the forest and nobody hears it.
For a game developer it could be said if you create a game that nobody plays, did you really develop it? That’s an exaggeration but Skillz does democratize the game development process. Their model is based on the idea that as developers create more content the site will get more engagement which leads to more revenue.
For their part, developers have an easier time getting discovered. And they have access to analytics that help them understand the core audience and which games are the most attractive to that audience.
For the gamer themselves, the Skillz model removes ads that interrupt the gaming experience. And it removes the “pay to win” aspect of in-game purchases. Plus, Skillz uses artificial intelligence to match gamers with individuals of a similar skill level. That leads to a higher winning probability which also makes those users more likely to pay to play the games.
Building an Invested Community
At several points on the company’s earnings call in May, management emphasized the significance of using paying monthly active users (MAUs) as a key performance indicator. This was in response to bearish reports that pointed to Skillz offering slowing MAU growth and a slowing rate of installations.
The company remarked that this focus on paying MAUs is intentional. At one point, co-founder and chief revenue officer, Casey Chafkin, remarked that paying MAUs for Skillz is similar to subscribers for Netflix (NASDAQ:NFLX). In other words, it wouldn’t make sense to look at Netflix simply based on how many eyeballs stream its programming. Rather, investors want to pay attention to monthly subscribers because those are the customers that are paying the freight.
A Tempest In a Teapot
I bring this up because the difference between paying MAUs and MAUs accounts for one complaint being made in the class-action lawsuit against the company. In the lawsuit, it’s alleged that Skillz “failed to inform investors that downloads of the games that account for a majority share of its revenue have been declining since at least November 2020.”
It’s hard to say whether the class action lawsuit has any merit. What seems clearer is that the effects of the lawsuit appear to already have washed out of the stock. That doesn’t mean the stock is driven by fundamentals. But with the stock down over 50% from its post-merger boost, there would have to be new news to push the stock lower.
SKLZ Stock Requires Patience or Nimble Trading Skills
Dana Blankenhorn described Skillz as being a “young man’s game, a young man’s company and a young man’s stock.” I agree. However, as a parent of such a young man, I understand that they really do spend their disposable income on the gaming industry.
And if the Skillz partnership with the NFL pans out, there will be many avenues for growth.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.