$375 Million Guidance Should Lead to Positive Free Cash Flow for Skillz

Skillz (NYSE:SKLZ) reported higher than expected revenue for Q1 on May 4, and more importantly, it raised its revenue guidance for 2021. Whereas in the past it had forecast $366 million in sales for 2021, now it says that revenue would hit $375 million. This has huge implications for SKLZ stock.

Hands holding smartphone at night with car lights and street in background

Source: Shutterstock

If Skillz can indeed make $375 million in sales for 2021, it would represent a 63% increase over the $230 million in sales it made in 2020. Moreover, with this higher 2021 guidance, analysts now estimate that the gaming company could make $555 million in revenue during 2022.

That represents another huge 48% gain in sales over 2021. It also means that in the space of two years, its sales would have more than doubled (+141%) in such a short period.

Skillz Stock Valuation

So no wonder Skillz stock now has a $6.11 billion valuation. That implies that its price-to-sales (P/S) multiple is fairly high at 11 times 2022 forecast sales. As one Seeking Alpha analyst points out, this is much higher than its peers in the online mobile gaming industry. Many of its peers have P/S multiples in the range of 3.5 to 8 times sales.

But I suspect something else is going on here as well. First, Skillz is still expecting much higher growth than its online peers. Second, the company should be able to start showing positive or close to positive free cash flow (FCF) by next year.

If it doesn’t, that would indicate that something is wrong with management. One potential issue could be if Skillz continues having such high marketing expenses in order to achieve this growth. It remains to be seen whether it will continue making reward and promotion payments at the same rate as today.

Nevertheless, if the company can’t make positive FCF with over half a billion in sales next year, then it may need to realign its expense structure. But that should be doable. If Skillz can’t perform in this regard, new management might eventually get it done. That is essentially what has happened at GameStop (NYSE:GME), for example.

So, for example, let’s assume that it can make a 15% FCF margin, or $83.25 million on sales of $555 million in 2022. Now assuming the market gives it a 1.0% FCF yield, its market value will be $8.325 billion ($83.25 / 1%). That represents a potential gain of 36.25% over its market cap today. This implies a price target of $21.32 (1.3625 x $15.65 price as of July 21).

What To Do With SKLZ Stock

This is a similar price target to what I forecast on April 8, when I argued that SKLZ stock was worth $20.72. Interestingly, most analysts have much higher price targets than I do. That is a rarity since I almost always seem to have higher valuations than most Street analysts.

For example, TipRanks.com reports that 5 analysts who have written on the stock in the last 3 months have an average price target of $24.50. That represents an upside of 57% from today’s price.

Here is another catalyst for the stock. On July 16, Skillz announced it would redeem all its public warrants for 1 cent. This essentially forces the owners to exercise their warrants and buy shares at $11.50.

Skillz gets to keep that money without having to pay any commissions to an outside dealer. The last 10-Q indicated on page 10 that there are 8,157,942 public warrants outstanding. This means Skillz will receive $93.82 million through the issuance of these shares. That is on top of the $612.6 million in cash on its balance sheet.

In other words, Skillz will have more than enough capital to survive, even if it doesn’t become free cash flow positive within the next year. But, of course, I don’t think that will happen. Look for SKLZ stock to hit $21.32.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2021/07/sklz-stock-375-million-guidance-should-improve-free-cash-flow/.

©2021 InvestorPlace Media, LLC