The last time I wrote about Skillz (NYSE:SKLZ) stock was July 14. I suggested that the Aarki insiders receiving SKLZ stock valued at $15 a share as part of their sale to the mobile gaming company ought to hang on to their shares because, in 12-24 months, it will seem like an outstanding deal.
Not much has happened between then and now except for the fact that on July 16, it announced that it would redeem all of the outstanding public warrants to purchase its Class A shares at a penny a warrant.
As my InvestorPlace colleague Mark Hake said on July 22, that would force warrant holders to exercise their right to buy shares at $11.50 apiece, raising approximately $94 million in cash.
That brings its cash on the balance sheet to $616.4 million [$612.6 million in cash as of the most recent quarter plus $94 million from exercise less $90 million in cash for Aarki acquisition].
Since my article, SKLZ stock has gone sideways, a sign that $15 appears to be a level of support for the stock. It hasn’t fallen below $15 since May. SKLZ stock traded above $15 from Dec. 1, 2020, through mid-April. It trades this morning at around $14.
As long as it’s below $15 SKLZ is a buy. Here’s why.
SKLZ Stock Liked By Analysts
Only six analysts currently cover Skillz. Four rates it a buy with two giving it a hold. That works out to an overall rating of overweight with a median and average target price of $24.0 and $24.25, respectively. At current prices, that’s more than 50% upside over the next 12 months.
I’d take that in a heartbeat.
While Skillz doesn’t currently make money — it has operating losses of $136 million in the trailing 12 months ended March 31 — its revenues have grown quickly. In 2018, it had sales of $50.8 million. A little over two years later, they’re 432% higher at $270.2 million.
As Hake mentioned in his article, Skillz should be free cash flow positive (FCF) by this time next year. At a 15% FCF margin and 2022 sales of $555 million, Hake gives it a 12-month price target of $21.32 a share.
Either way, the aggressive investor ought to buy at current prices. If it falls below $15, they should back up the truck to buy as much as possible.
Skillz Has High Engagement
The Motley Fool’s Parkev Tatevosian recently argued that Skillz has a couple of strategic advantages over the competition.
First, the platform’s ability for wagering on the actual game playing makes it a heck of a lot more fun and engaging.
Second, because players are more engaged, they tend to spend more time on Skillz-connected games than its free-to-play competition.
If you exclude the $54.2 million it spent on acquiring customers in Q1 2021, the company had adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $23.07 million [Adjusted EBITDA of -$31.13 million less $54.2 million] and an adjusted EBITDA margin of 28.3% [$23.07 million divided by revenue of $83.68 million].
In the past four quarters, Skillz has spent $164 million acquiring customers. By acquiring an ad-tech company in Aarki, the company will cut out the middleman and ultimately boost its adjusted EBITDA margins into the 30s or higher.
That’s excellent news for shareholders.
My InvestorPlace colleague, Larry Ramer, believes that Skillz’s 2.7 million monthly users are peanuts and that e-sports is not the next social media.
“Moreover, e-sports as a whole is not a very big phenomenon, so Skillz’s growth outlook isn’t that strong. In my last column on SKLZ stock, I reported that 3.1 billion hours of esports were viewed in Amazon’s (NASDAQ:AMZN) Twitch system, a worldwide platform which features many e-sports channels,” Ramer wrote on July 13. “But 3.1 billion hours over a quarter for a global platform actually aren’t very impressive.”
My colleague misses that the company gets a percentage of the entry fees paid by its users for the contests they enter. Page 40 of its 10-K points out that a typical user spends 60-62 minutes per day playing games on its platform. That’s considerably higher than Ramer’s Facebook (NASDAQ:FB) estimate of 34 minutes per day.
Quite simply, Skillz is not an advertising-driven business model.
The Bottom Line
InvestorPlace’s Luke Lango pointed out in June that the Aarki acquisition enables Skillz to create an “end-to-end ecosystem that solves every problem for an app developer, from development to distribution.”
Lango believes that the partnerships Skillz is entertaining — the NFL and Playboy are two examples — will drive its stock to $30.
While that hasn’t happened quite yet, I do think the company is building a platform that will make everyone happy: Players of its games, developers of games, and most importantly, SKLZ shareholders.
If you can still buy SKLZ for under $15, you absolutely should.
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.