The meme stock movement in 2021 has placed a particular emphasis on the short squeeze, the act of betting against a particular company by borrowing its stock in the hopes it will move in reverse. As a result, names with high short interest, such as Skillz (NYSE:SKLZ) stock, garner significant attention from retail investors.
Unfortunately, if you are an owner of SKLZ stock, you’re bound to encounter above-average volatility.
Not every investor is psychologically fit to handle the added stress. That’s why many investors are better suited to low-cost S&P 500 index funds.
I’m a fan of the movie Wall Street with Michael Douglas and Charlie Sheen. There are so many lines that still apply to today’s 24/7 world. For example, in one scene, veteran stockbroker Lou Mannheim (played by Hal Holbrook) tells up-and-coming salesman Bud Fox (played by Sheen) that there are no shortcuts in life.
“Stick to the fundamentals. That’s how IBM and Hilton were built. Good things, sometimes, take time,” Mannheim said to Fox.
I’ve been writing about stocks for more than a decade. I continue to be amazed by how many people confuse luck with skill. You might get lucky by chasing a short squeeze, but that won’t advance your skill level as an investor.
As Mannheim said, it’s best to stick to the fundamentals. In Skillz’s case, that’s absolutely 100% bang on. Here’s why.
SKLZ Stock and a Short Squeeze
InsiderMonkey published an article in June that highlighted the top five short squeezes of all time. Not a surprise, two of the five happened in 2021: GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC).
I’m sure the professionals who follow short squeezes for a living would be able to put together a more comprehensive list. However, it illustrates that never before has such an emphasis been put on short-squeeze candidates.
I did an internet search for the words “InvestorPlace short squeeze” and came up with 15,800 results. Here at InvestorPlace, we try to give the people what they want. Clearly, our readers are mesmerized by short squeezes.
On our own site, I could only find one article with short squeeze and Skillz in the headline. That was back in April when three different short reports surfaced, putting the company’s future revenue projections in doubt. Since then, there’s been plenty written about the company, many of which have touched on the subject.
At the end of August, I suggested that the risk-to-reward proposition had turned in investors’ favor.
“If you’re an existing shareholder and can afford to lose 100% of your investment, I would seriously consider buying more SKLZ stock under $11. I thought it was a buy under $15. I still think it’s a buy,” I wrote on Aug. 31. “But only for aggressive investors. This isn’t one for your retirement portfolio.”
According to SwaggyStocks, SKLZ’s popularity on r/WallStreetBets fell off a cliff in September as its share price retreated below $11. I think that’s a good thing because it suggests retail investors don’t consider SKLZ a legitimate short squeeze.
Stick to the Fundamentals
To help me do that, I’ll provide a counterargument to my InvestorPlace colleague, Larry Ramer, who is negative on the stock.
He believes Skillz’s valuation is excessive at 13x analysts’ 2021 sales estimate. Furthermore, my colleague considers its Q2 2021 year-over-year sales growth of 52% to be good, if not great. Furthermore, traditional video game companies are experiencing a bookings slowdown combined with low double-digit video-game sales industry-wide suggesting the good times might be over. Lastly, he expects meme stocks such as SKLZ to weaken in the fall and winter.
Right there, I’ve got four points to counter.
As I wrote in my August commentary, it boggles my mind that a company with no revenue, such as Cassava Sciences (NASDAQ:SAVA), is valued at $1.8 billion while Skillz, which has $301 million in trailing 12-month sales (TTM), is only valued at $4.4 billion, or 14.6x TTM sales and 7.9x analysts’ 2022 revenue estimate of $556 million.
Whether you agree or disagree with the future potential of Skillz’s esports platform, the company’s revenues are real and growing.
According to Finviz.com, there are 11 electronic gaming and multimedia industry companies with a market capitalization greater than $2 billion. Skillz is one of those 11. Of the eight with a five-year sales track record – Bilibili (NASDAQ:BILI) and Sea (NYSE:SE) – only two managed a growth rate higher than 52%.
So, I don’t think you can categorize the company’s growth rate as anything but healthy. In fact, I would be worried about a stock whose growth rate was excessive. They tend to burn out rather quickly.
In May, VentureBeat reported on a new report from Newzoo, a global leader in gaming industry data analytics and marketing research. The report suggested that video game revenues will exceed $200 billion worldwide by the end of 2023, leaving plenty of sales growth available for Skillz.
“While we say the forecast is for the market to decline this year, in the long term, or over more than a few years, there is still very healthy growth for the market. And this year  is basically the year where we slightly correct for what was a crazy 2020 for the games market,” VentureBeat quoted Newzoo games market lead Tom Wijman in an interview with GamesBeat.
All industries experience periods of cooling off. I believe this is healthy. I don’t see gamers suddenly deciding to take up knitting or some other tactile activity.
As for meme stocks, I absolutely couldn’t say whether their day in the spotlight will end today, tomorrow, or next year.
The Bottom Line
InvestorPlace’s Mark Hake recently discussed his fair value for SKLZ, given analysts’ lowered growth estimates. He believes $14.65 is the right price target for SKLZ over the next 12 months. As I write this, we’re talking about 34% upside.
If I guaranteed this return for you over the next 12 months, you would beg, borrow, and steal to get a position in Skillz. But, alas, I can’t do that.
If you’re a speculative investor, SKLZ is in the buy zone. However, if you’re risk-averse, this shouldn’t be your cup of tea.
Fundamentally, however, SKLZ stock remains an attractive long-term speculative buy.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.