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Only Buy Skillz Stock If You Have a Strong Stomach

Even among growth stocks popular with retail traders, Skillz (NYSE:SKLZ) stock is one of the riskiest out there.

SKLZ stock
Source: Dean Drobot/Shutterstock.com

Yes, the upside potential here could be massive, if the company succeeds in turning its mobile gaming tournament platform into a cash cow. But if it falls short of projections? As SKLZ stock still trades at a high forward price-sales ratio, additional downside could be substantial.

Even if it continues to perform in line with expectations, a possible stock market correction may result in another big drop for this already-volatile stock. Why? The next downturn could bring an end to the days where early-stage growth stocks trade for high price-sales multiples. Even a modest amount of multiple compression would mean another 49% decline for SKLZ stock.

That being said, you don’t need to wait until it trades for fire sale prices before buying. If you’re confident this stock is a multi-bagger in the making, entering a position at current levels (around $10.60 per share) could still be worthwhile. Just keep in mind that its eventual path back to its past high of $46.30 per share, could be bumpy. It may fall to single-digit prices before it starts to rebound.

Why Story Hasn’t Changed Much for SKLZ Stock

Down around 29% in the past, what’s going on with Skillz? The continued pullback kicked off when the company announced its latest quarterly results on Aug. 3, and only as of this writing have shares started to bottom out.

Back on July 30, I had a more optimistic prediction about how SKLZ stock would fare post-earnings. Unfortunately, that’s not how things played out. Investors were clearly more disappointed that losses were more than expected, instead of being happy revenue growth (52%) slightly beat expectations. But while investors reacted negatively to its latest results and shares have drifted lower, the story’s not changed much for SKLZ stock.

Why? Given its continued to post higher-than-expected losses each quarter, concerns about this may be overblown. It’s established that while it’s on the road to scaling up, the company is not going to be profitable.

And with regards to scaling up? It’s still making all the right moves. As seen from its year-over-year sales growth last quarter, it continues to increase its top line at a rapid clip.

With its pending acquisition of mobile gaming ad platform Aarki, the company is bolstering its monetization and player acquisition capabilities. With its strategic investment/partnership with developer Exit Games, the company will be able to offer a wider variety of games on its platform. It still looks set to continue growing its sales, one day hitting adjusted EBITDA margins of 30% (as projected in its September 2020 investor presentation). But while the future remains bright, shares could face further temporary declines on the way back to higher prices.

Skillz May be Set to Take Another Big Tumble

Shares in this mobile gaming play may still offer up the potential for big gains over the long term. Yet in the short-term, SKLZ stock could experience a fall in price greater than markets overall.

Skillz’s still-high valuation gives it heavy downside risk. A shift from a bull to bear market could make investors less willing to give it such a high forward sales multiple. In other words, Skillz’s current forward price-sales multiple of 7.9x (based on 2022 projections) could compress.

Even valuation compression down to 4x 2022 estimates would mean a decline in its stock price to around $5.50 per share. That’s about 50% below where it trades today. For those in it for the long haul, this may not matter. The timeline for the company to reach big success (billions in annual revenue, high EBITDA margins) remains years away.

When it reaches that point down the road, its fundamentals may be strong enough to support a valuation on par with the high prices it traded for earlier this year (over $40 per share). In the meantime, impatient investors may cash out, temporarily sending it to single-digit prices.

Buy If You Have a Strong Stomach

Despite possible continued volatility, entering a small position in Skillz now may still make sense. There’s still big potential for it to eventually bounce back to its high-water mark. If it continued to head lower, this may even be a situation where “averaging down” makes sense.

Risk-averse investors may want to stay away. But if you have the stomach for it and believe it has the makings of a long-term winner, then buy SKLZ stock today and buy more on any additional pullback.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2021/08/only-buy-sklz-stock-if-you-have-strong-stomach/.

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