Analysts have been lowering their projections for Skillz, Inc. (NASDAQ:SKLZ) next year. This has cut the concurrent value for SKLZ stock. The problem is that the company’s growth may not be as robust as analysts previously thought. And this is despite the fact that it actually increased its revenue guidance for this year.
For example, I wrote last month that analysts surveyed by Seeking Alpha were expecting revenue next year of $559.8 million. This is up 49.8% from the company’s own estimate of sales for 2021 of $376 million.
That lowers the potential revenue growth for 2022 to 47.8%, or 2 percentage points lower than the prior estimate. We can use that to revalue SKLZ stock.
Re-Estimating FCF and Valuation for Skillz
Last month I forecast that Skillz might end up posting a 15% FCF margin next year, given that its sales are forecast to grow almost 50%. However, just to be conservative, let’s assume that the FCF margin will be 25% lower at 11.25%. Therefore, the new forecast for 2022 FCF is equal to 11.25% times $555.7 million, or $62.51 million.
Next, last month I used a 1% FCF yield to value the stock. If we use that same measure this time, the implied value will be $6.251 billion.
That represents a potential upside of 34.4% over the company’s existing market cap of $4.65 billion. In other words, SKLZ stock is worth $15.51 per share, or 34.4% over its Sept. 8 price of $11.54.
A second way to value SKLZ stock is to use a price-to-sales (P/S) metric. For example, Seeking Alpha reports that Skillz has a P/S ratio of 11.93x for 2021 and a metric of 8.37x for 2022. The average between these two is 10.15x. So sometime next year, the stock should end up having a 10 times P/S valuation.
So, for example, if we multiply 10 times its 2021 sales estimate of $555.7 million, the stock will have a valuation of $5.557 billion. This represents a potential gain of 19.5% over its market value today of $4.65 billion. In other words, another price target using P/S metrics is $13.79.
Where This Leaves Skillz
So now we have two estimates for SKLZ stock. Using an FCF estimate, which assumes that the company will become FCF profitable next year, it is worth $15.51. But again, that assumes a major turnaround occurs in its cost structure and profitability. I am relying on the fact that a 47% growth in sales next year will make room for this to happen.
In addition, we have a P/S metric valuation of $13.79. This does not rely on profitability. It uses an average price-to-sales metric over this year and next. In that sense, it is probably a bit more reliable.
The average between these two targets is $14.65 per share. That represents a potential upside of 26.95% — or basically 27% — over its Sept. 8 price of $11.54. It is also much lower than my previous price target of $20.26 per share. This is due to my desire to be more conservative, given that analysts seem to be lowering their revenue growth estimates.
What to Do With SKLZ Stock
Investors might want to take a toehold stake in SKLZ stock now that it is at a trough price. Even after I cut my estimate back using both FCF yield and P/S valuation methods, I come up with a price target 27% higher at $14.65 per share.
That is still a very good forecasted return for most investors. So even if Skillz ends up with a lower growth rate, one can expect a good return on their investment with SKLZ stock.
On the date of publication, Mark R. Hake did not hold a position, directly or indirectly, 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.