With its staggering drop in price — despite the optimistic outlook from management — you might be wondering if the market is simply misunderstanding the situation with Skillz (NYSE:SKLZ). Not so fast. Unfortunately, the sentiment toward SKLZ stock is right on the money.
How so? A few months back, when it was trading at much higher prices, this appeared to be a bona-fide growth story. Building up the user base for its real money competative mobile gaming platform, Skillz appeared on its way to scaling up into a massive business. One that, at scale, would have high operating margins.
Flash forward to today, however, and it’s tough to maintain that view. On the surface, the company still appears to be growing at a rapid clip. But taking a closer look, subsequent numbers may not be as stellar. Based on indicators like Monthly Active Users (MAUs) and Average Revenue per paying user (ARPPU), there may be trouble ahead.
If it continues to struggle to grow revenues among its existing user base? It’ll have to continue spending heavily on new user acquisition. That means a cloudier path out of the red, and to the point of profitability.
With this concern in mind, plus the prospect of it falling short of expectations when it next releases quarterly results on Nov. 3, I suggest you stay away.
Why SKLZ Stock Tanked
Several factors have played a role in sending Skillz from $46.30 to $9 per share. First, the pullback in special purpose acquisition company (SPAC) stocks last spring. As a former SPAC itself, it too saw declines, as these types of stocks declined in popularity among retail investors.
But that’s not the sole reason SKLZ stock is down so much. Developments, such as its secondary offering back in March, put pressure on it as well. Yet what has driven the bulk of its price decline over the past eight months has been the sharp change in sentiment about its future prospects.
As I hinted at above, at the top level this mobile gaming play seems like it’s still a fast growing company. Revenue for the quarter ($89.5 million) was up 52% year-over-year. Gross profits were up by the same percentage. However, in its quarterly earnings release for the quarter ending June 30, 2021, a few figures stick out.
Namely, its MAU and ARPPU numbers. Between the March and June quarters, MAUs fell from 2.6 million, to 2.4 million. Quarter-over-quarter, ARPPU slipped from $64.99, to $64.36.
The takeaway? Its strategy of spending heavily to attract new users, then maximize revenue from them over time hasn’t worked. Churn is still high. That’s why, although revenue and gross profit soared, net losses did as well. For the third quarter 2021 (Q3 2021), the company lost $79.6 million, nearly four times its losses ($20.2 million) in Q3 2020.
Skillz isn’t having a hard time attracting first-time users. Keeping them, and keeping them spending, is where the challenge lies. It does have a game plan to improve retaining these users, and to attract more users to the platform without such an aggressive ad spend.
The problem? It remains to be seen whether it works.
At Best, It’s a ‘Show Me’ Situation
Knowing full well it’s on a troubling path to further losses, the company is smartly changing up its strategy. That’s why, in recent months, it has made a major acquisition, and has made a major partnership deal with a mobile game developer.
What does the company get from buying Aarki, a mobile gaming advertising platform? Back in June, two analysts (Michael Graham and Maria Ripps) from Canaccord Genuity cited two reasons why this deal was a positive for SKLZ stock.
First, it enhances its value proposition to prospective third-party game developers. Offering in-house ad monetization, along with a platform for developers to operate their games, Skillz may be able to improve the quality of its offering. Second, having an in-house mobile ad agency will help reduce its user acquisition costs. As for its mobile game developer deal? Partnering with Exit Games, Skillz stands to make its platform more competitive, by offering a wider selection of games (including racing and fighting games).
But while it may have a plan out of its current issues, this is still, at best, a “show me” situation. Until it can show investors in its results that its continuing to grow revenue, MAUs and per-user revenue, all while getting costs under control? Don’t count on a recovery.
The Verdict on Skillz Stock
In theory, this once-hot growth stock has a path to recovery. Yet fixing what’s wrong with it (outsized customer acquisition costs compared to revenue) is going to take time. Its problems today aren’t going to get resolved in a quarter or two. With this in mind, don’t hold your breath that its upcoming results for the September quarter will beat analyst expectations.
Given these factors and its F-rating in Portfolio Grader, avoiding SKLZ stock is your best move.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (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.
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