After touching highs of $46.3 in February 2021, the performance of Skillz (NYSE:SKLZ) stock has been unimpressive.
The stock currently trades at around $12.50 and has failed to break out on the upside several times in the recent past.
However, it seems to me that the worst might be over in terms of stock performance. SKLZ stock can possibly witness some consolidation followed by a break-out on the upside.
Let’s first talk about the reason for the stock staying depressed. For Q1 2021, the company reported revenue growth of 92%. In the most recent quarter, the company’s growth decelerated to 52% on a year-on-year basis.
However, a more important reason for the stock trending lower is the trend in monthly active users.
For Q1 2021, the company reported MAU of 2.7 million.
For Q2 2021, the company’s MAU declined to 2.4 million.
Clearly, the markets are unhappy with this trend and it’s a reason to be concerned, but I do believe a reversal in that trend is around the corner.
Positive Business Catalysts
Amidst the concerns, there are few positive factors. First and foremost, Skillz reported average revenue per active user of $6.65 for the first half of 2020. For the comparable period in the current year, the ARPU was $11.44.
While user acquisition has been sluggish, paying users have been increasingly spending on the platform.
If the growth in ARPU is coupled with growth in active users, SKLZ stock is likely to trend higher. I believe that there are two factors that can drive active user growth in the next few quarters.
First, Skillz is on track to launch in India by the end of the year. Currently, 90% of the company’s revenue comes from North America. India is likely to be a big market and can support strong growth in active users.
Second, the company acquired Aarki, the first integrated e-sports advertising platform, on June 2. Aarki currently has a reach of more than 465 million monthly active users. According to Cathie Wood’s Ark Investment Management, the acquisition is likely to help the company in accelerating international expansion.
India is just the first market for international expansion. In the next few quarters, the company is likely to make inroads into new geographies. This is one factor that can significantly accelerate growth.
Strong Financials to Invest in Growth
Skillz reported cash and equivalents of $692.8 million as of Q2 2021. Further, the company has zero debt. There is ample financial flexibility for organic and acquisition-driven growth.
I would not be surprised if the company pursues further acquisitions that boost its active user base.
Another important point to note is that the company reported sales and marketing expenses of $195.8 million for the first half of 2021. On a y-o-y basis, the company’s sales and marketing expenses increased by 97%.
This trend is likely to sustain in the coming quarters considering the financial flexibility.
This marketing investment is likely to translate into relatively healthy user growth. On the flip-side, if user growth remains weak even with an aggressive marketing spend, it might make sense to exit the stock.
Another important business development in the recent past is the company’s partnership with Exit Games. The latter has the world’s most advanced synchronous multiplayer gaming technology.
The partnership will help Skillz expand into raging, fighting and first-person shooter genres and is another reason to believe that active user growth is likely to accelerate.
Concluding Views on SKLZ Stock
Skillz might not have lived up to investor expectations. The company is however making efforts to boost active user growth through the organic and acquisition drive route. I believe that the next few quarters are likely to be better in terms of key growth metrics.
For 2021, Skillz has guided for revenue of $376 million. The stock is therefore trading at a market capitalization that’s 12.7 times 2021 revenue. This might seem expensive.
However, if top-line growth remains robust and cash flows accelerate, SKLZ stock will trend higher from oversold levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
