Editor’s Note: This article was updated on Oct. 26, 2021, to correctly identify the CEO of Skillz.
When Skillz (NYSE:SKLZ) stock traded at a 52-week low last week, it validated the bears.
The stock has a short float of more than one-fifth. How did the skeptics know that this electronic gaming and multimedia firm would fall by so much?
Momentum investors tried to lift SKLZ stock a few times in the summer. Before the Nasdaq corrected in September, the stock tried to rally one last time. Now, it faces severe technical chart headwinds.
Buyers must overcome the 200-day moving average. Otherwise, the stock risks finding new lows.
At a global technology conference, Chief Executive Officer Andrew Paradise acknowledged the increasing challenges amid the past two-fold to four-fold in revenue growth.
He said that the company could not retain the best talent nor could it hire more staff to support growth. This led to the business playing catch up. User acquisition prices in the last several months rose.
Skillz now has a revenue team in place. It will keep adding talented staff to re-accelerate game and platform development.
The CEO is confident that the company will launch successful games. The stock market has an opposing opinion. The share slump suggests that staff costs will grow.
Risks are rising that Skillz will not have a good game launch that will win back investor confidence.
A Closer Look at SKLZ Stock
Readers may assume that the cooking genre for mobile games will remain popular.
Trivia Crack, which Skillz developed with its partner Etermax, is potentially a global success. The title is available in 180 countries and 34 languages. CEO Paradise said that the title has 150 million active users annually.
Among the above-mentioned titles, Trivia Crack is a potential winner for Skillz. It worked closely with the Etermax team and could become the Jeopardy title of the interactive entertainment segment.
Skillz did not forecast the potential revenue contribution from the title yet. If it grows in popularity, though, Skillz will attract more development talent. This will increase the value of its intellectual property on the platform.
Markets would have to recognize the improving valuation, giving the stock a much-needed lift.
Skillz is looking beyond the mobile gaming and competitive gaming market. The CEO saw how Duolingo (NASDAQ:DUOL) rose in value after its initial public offering.
DUOL stock trades at a 30 times price-to-sales ratio. Markets value Skillz at a P/S of around 12 times. The education market is a potential segment for the company to pivot into next. Furthermore, the fitness app market is promising. For example, Strava is a fitness solution on the phone.
Just as Strava offers a fitness score for users, Skillz may consider that market, too.
Risks and Opportunities
In the near term, Skillz must improve its value chain. It acquired Aarki on June 2, paying $150 million in cash and stock. Besides just collecting billions of data points on user behavior, Skillz needs to tie the data back to advertising. Once it does that, it may increase its revenue from ads.
In August, Skillz expanded into fighting, racing and first-person shooter genres by investing $50 million in Exit Games. The company is betting that users want a highly synchronous video game experience among devices (mobile and tablet).
The network upgrade to 5G will lower latency. This will allow Skillz developers to offer gaming accessibility everywhere.
Skillz has lofty targets. It wants to capture 2.8 billion gamers. This will have operating costs. If its 30% EBITDA margin target for the long-term slips, investors may bail on the stock.
Skillz included customer acquisition costs in its EBITDA margin target. Investors will expect its marketing efforts will lead to a larger user base. If management fails to do so, the stock will face continued selling pressure.
Fair Value and Your Takeaway
On Stockrover, SKLZ stock is fair. The quality score, based on such metrics as return on investment, is 49/100. The value score is 42/100.
Skillz is high-risk speculation. Investors who overpaid for the stock earlier this year should consider taking a loss. The stock rose on momentum. With markets getting increasingly nervous, chances are low that the buying frenzy will return.
Investors may consider starting a position in the stock after it posts quarterly results.
The company needs to post higher user growth and lower acquisition costs. That combination would reaffirm the business model is not broken.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.