Since the listing of Skillz (NASDAQ:SLKZ) stock in December 2020, there has hardly been any reason for investors to rejoice. After touching highs of $46.30 in February 2021, SKLZ stock has been in a sustained downtrend.
Of course, there are multiple reasons to be worried. However, even without these factors, SKLZ stock seems significantly oversold.
Before taking about some of the concerns, let’s look at the industry potential. The mobile gaming market was worth $86 billion in 2020. And the market size is expected to swell to $161 billion by 2025.
This presents a big growth opportunity for Skillz. As a matter of fact, the company’s top-line growth has been healthy. For Q2 2021, Skillz reported 52% revenue growth on a year-on-year basis to $89.5 million.
Additionally, as of Q2 2021, the company reported cash and equivalents of $692.8 million with zero debt. Therefore, the addressable market is significant and Skillz has ample financial headroom to pursue aggressive growth.
So if the outlook is this bright, what’s the reason for the stock being depressed?
The Challenges for SKLZ Stock
For Q2 2021, Skillz reported monthly active users of 2.4 million. For the prior year comparable period, the active users were 2.6 million. I believe that this is the biggest concern for the company. User growth has been dismal even with a big addressable market.
The positive point to note is that the average revenue per paying user was $64.36. Currently, the company has a small paying-user base of 0.46 million. If Skillz is successful in expanding the paying-user base, top-line growth is likely to remain robust.
Another big concern for the company is the marketing expenses. For the first half of 2021, Skillz reported sales and marketing expense of $195.8 million. On a year-on-year basis, sales and marketing expense increased by 97%. However, there was no impact in terms of growth in the user base. If this trend sustains, the company is likely to burn all the balance sheet cash without meaningful growth in revenue or the user base.
Revenue concentration risk is another factor impacting SKLZ stock. For 2020, just three games contributed 79% of revenue.
Positive Business Developments
Despite all that, there are several factors for SKLZ stock that could be game changers.
First, according to Skillz, there were 30,000 game developers in 2009. Currently, there are 10 million game developers. This is likely to translate into more diversity in terms of games and help in revenue diversification.
Second, in August 2021, Skillz formed a strategic partnership with Exit Games. With this partnership, developers will be able to utilize the advanced synchronous multiplayer gaming technology. This will help in creation of real-time, synchronous multiplayer games. Therefore, it’s likely that the partnership will help in boosting users and user engagement.
Third, Skillz has also partnered with NFL. The partnership will identify new NFL-branded mobile game(s). As a part of this initiative, 14 games are already in the development phase.
In another important development, one of the most popular mobile trivia games in history, Trivia Crack, will soon be available through Skillz. The Trivia Crack franchise will be creating an all-new game exclusively on the Skillz platform.
The key point here is that several new games are in the development pipeline through these partnerships. New games have the potential to boost the active user trend.
It might therefore be too early to write off Skillz—and SKLZ stock.
The Bottom Line for SKLZ Stock
Strategic partnerships and possible acquisitions can be catalysts for growth. Plus, the company also has a strong balance sheet and plans for international expansion. With entry into markets like India, it’s likely that monthly active users will greatly increase.
Overall, SKLZ stock seems to have minimal downside risk from current levels. However, if the strategic partnerships and new game development deliver, the upside potential can be significant. Fresh exposure can therefore be considered at current 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 modeling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector.