I recently read a headline that suggested that Skillz (NYSE:SKLZ) stock rallied as it joined the list of hot meme stocks. It’s entirely possible that SKLZ stock is in the radar of Reddit investors. However, the stock is far from being just a meme stock or a speculative stock.
I do agree that Skillz has disappointed investors. The stock has also been punished in line with weak growth metrics. However, after a downside of 50% in the last six months, the stock seems attractive. Importantly, it’s too early to assume that Skillz is unlikely to gain business growth traction. If that happens in the next few quarters, a sharp rally seems likely.
It’s also worth noting that the casino and online gambling industry has witnessed merger and acquisitions. CTFN recently suggested that Skillz might be among the potential names in the merger and acquisition radar. This is another factor that can serve as a catalyst for SKLZ stock.
Skillz ended the second quarter with cash and equivalents of $693 million. Therefore, there is ample flexibility to pursue organic and acquisition driven growth.
User Growth Remains a Concern
For the second quarter, Skillz reported revenue of $89.5 million. On a year-on-year basis, revenue growth was healthy at 52%. Further, the company reported average revenue per user of $12.46. For the prior comparable period, average revenue per user was $7.49. Clearly, monetization has been robust.
However, the key concern for Skillz is user growth. For second quarter, the company’s monthly active users were 2.4 million, which was lower by 6% from the previous year. This was offset by the fact that paying monthly active users increased by 53% to 463,000.
Even with growth in average revenue per user, stock upside is unlikely until there is meaningful growth in monthly average users. I believe that there are few factors that can serve as catalysts for user growth.
First and foremost, Skillz has plans to enter India later this year. The country has a big addressable market with strong growth in smartphone users. Healthy growth seems likely in active users if Skillz can penetrate the market.
Furthermore, Skillz acquired Aarki in the last quarter. The demand-side platform has more than 465 million monthly active users. This merger is likely to help in accelerating Skillz user base.
Skillz formed a strategic alliance with Exit Games in the second quarter. The partnership will allow the company to use Exit Games technology to host real-time, synchronous, multiplayer games.
Clearly, the company is making efforts towards broadening the scope of engagement and accelerating user growth. Besides entry into India, Skillz also has plans for other international markets. The company believes that the total addressable global market for mobile gaming is $86 billion. It might therefore be too early to write-off SKLZ stock as a meme stock.
Concluding Views on SKLZ Stock
For Skillz, growth is directly related to a sustained upside in gamers as well as developers. In 2018, the company had 18 games with an annualized gross merchandise value of more than $1 million. By Q2 2021, the number of games with over $1 million gross merchandise value increased to 42.
With alliances that advance the technological capability of the platform, developers are likely to create more engaging content.
For Q2 2021, Skillz also reported an adjusted EBITDA loss of $31.6 million. EBITDA level losses widened on a year-on-year basis. However, that’s not a concern in the near-term with the company ramping-up marketing and selling expenses.
It would be a red flag if marketing and selling expenses remain high in the next few quarters without any meaningful growth in users.
Overall, SKLZ stock looks attractive at current levels. Even if there is a slight indication of growth in users in the coming quarter, a sharp reversal seems likely.
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 modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.