On June 1, Skillz (NYSE:SKLZ) announced that it would buy California-based Aarki for $90 million in cash and 4 million shares of SKLZ stock.
Aarki’s home page says, “Aarki Encore is an AI enabled platform for programmatic media and creative optimization using proprietary data.”
In a nutshell, the acquisition of Aarki gives Skillz access to more than 465 million monthly users. In addition, Aarki gets to use its artificial intelligence (AI) and machine learning technology to work with Skillz’s first-party data.
It’s a win-win situation for both companies.
As mentioned in the opening, Aarki insiders get 4 million shares in the transaction. Based on the deal’s $150 million price tag, the stock received is valued at $15 a share.
Should Aarki’s insiders hang on to the stock? I believe they should. Here’s why.
SKLZ Stock at $15 Is a Good Price to Pay
In early February, Skillz hit an all-time and 52-week high of $46.30. It then lost 73% of its value, falling to a low of $12.40 on April 21. Two days earlier, I suggested investors wait to see if it falls any further before buying. I thought there was a real possibility that it could fall into single digits.
It lost $2 to $3 more before hitting its $12.40 low, but moved back up into the $20s by the end of the month. Except for a brief period in May, it’s traded between $15 and $25 ever since.
As I write this, SKLZ is less than $17, down 22% over the last month. It’s slumping badly at the moment. Should it fall below $15, aggressive investors ought to be buying with both hands. Twelve to 24 months from now, it’s easily a $30 stock.
Why?
Well, as I said in April, good things are happening.
“In the case of Skillz, the fact that its monthly active users (MAUs) were up 20% in the fourth quarter compared to last year, and the paying monthly active users (pMAUs) was up 121% over last year tells me good things are happening,” I wrote on April 19.
Strong Q1 2021 Results
Two weeks after my April piece, Skillz reported its Q1 2021 quarterly results, which included 467,000 paying monthly active users (pMAUs), 17% of its 2.75 million MAUs. That’s 8x higher than the mobile gaming industry average. Its pMAUs in Q1 2021 was also 19.4% higher than the 391,000 in the fourth quarter.
If this number keeps moving higher on a sequential basis, life is golden for SKLZ shareholders. Also, keep in mind that the average revenue per user (ARPU) has almost doubled over the past four quarters from $5.57 (Q1 2020) to $10.35 (Q1 2021). It’s also up 9.9% from Q4 2020 ($9.42).
“The big number will be the sequential growth of the Paying MAU to MAU ratio from Q1 2021 to Q4 2020. If that’s higher, Bob’s your uncle,” I wrote in April. “According to the company’s March 25 press release, it expects a Paying MAU to MAU ratio of 17.3%, 100 basis points higher than the quarter prior. If it does this for several quarters in a row, forget $46, SKLZ will be $100.”
Let’s not get ahead of ourselves.
The Bottom Line
Adding Aarki to the mix only makes the ARPU possibilities over the next four quarters that much greater.
In May, I thought Skillz was worth a look, given that the acclaimed investor, Cathie Wood, was buying SKLZ on the dips. According to The Motley Fool’s Rich Smith, Wood’s Ark Innovation ETF (NYSEARCA:ARKK) owned 15.26 million SKLZ shares as of May 14. As of July 7, ARKK held 15.45 million shares, so she’s still buying.
Between Wood’s ownership, the fact that Skillz came public through a Jeff Sagansky and Harry Sloan SPAC, and the company participates in mobile gaming, one of the hottest industries around, I think the risk-reward proposition is excellent between $15 and $20.
If you buy at current prices, be prepared for a lot of volatility. I would not be surprised if it tests $15 on the downside again soon. If you do buy now, I’d keep some cash on the sidelines so you can buy some more at $15 or less.
In the long term, you ought to do just fine.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
