Skillz (NYSE:SKLZ) stock hasn’t exactly fallen to a “bargain basement” price. A month ago, with SKLZ stock near $11 a share, I said until that happens, it’s best to hold off buying.
Why? Before, I’ve noted that this stock could have big downside risk fueled by multiple compression.
Yet, taking another look at the situation, a further move lower on valuation concerns (if it happens) could be only modest. Upcoming tapering, and possible interest rate changes by the Federal Reserve, may come at a slow enough pace to prevent another big slide in price for growth names.
In addition, there’s another reason why it may be time to buy. That would be the fact that investors are treating this like it’s already a busted growth story. But not only has it yet to fall far short of expectations when it comes to revenue growth. Based upon the moves the company’s made in recent months, it still stands to ultimately deliver stunning growth.
As it’s able to rationalize its customer acquisition costs, margins will go up in a big way. Once Mr. Market comes to that conclusion, shares stand to begin their recovery.
At around $9 per share as of this writing, now may be the time to initiate a position.
SKLZ Stock Risks Further Multiple Compression
If you’ve read my other articles, you’ll know my style of investing leans more Graham-and-Dodd than Cathie Wood. That is, I prefer value plays to growth stories. With this, while I’ve appreciated the long-term potential of Skillz, I have noted in my past articles how it may be at risk of making another big move lower, due to its rich valuation relative to peers.
For example, at today’s prices, SKLZ stock trades for around 6.5x its projected earnings for next year ($555.7 million). By comparison, Zynga (NASDAQ:ZNGA), a more-mature mobile gaming company, but one that’s still seeing moderate growth, trades for just 2.7x sales.
What if f investors become more bearish on growth stocks overall, due to the factors mentioned above, or if the company falls short of expectations in the upcoming quarters?
It may be at risk of making another double-digit percentage move lower. With this, I’ve taken a “caution is key” view. However, looking back on it now, and based on what’s played out in the markets over the past month, further downside risk may be limited.
How? If the Fed’s tightening measures play out slow enough, it may mean a soft landing for growth stocks, after the incredible run. Better yet, what if Skillz can convey to investors that it’s still a growth story? A shift in sentiment from negative back towards positive could outweigh the multiple compression risk, enabling shares to make a move back toward prior price levels.
Not a Busted Growth Story… Yet
Based on how SKLZ stock has performed, you would think it was having problems similar to that of names like ContextLogic (NASDAQ:WISH). As you may know, once-hot WISH stock has fast fallen out of favor, as it’s gone from having impressive quarterly revenue growth, to negative quarterly revenue growth.
However, that has yet to happen with Skillz. It has continued to grow its sales on an year-over-year basis. For example, for the quarter ending June 30, 2021, revenue was up 52% from the prior year’s quarter. Along with this, it hasn’t had to walk back its guidance.
Yes, in one key way, both are similar. They’ve both leaned heavily on high ad spend to acquire customers. As a Seeking Alpha commentator recently noted, that’s another area of concern among investors when it comes to Skillz. Given it’s started to take its foot off the ad-spend gas pedal (due to high ad prices), its monthly active user (MAU) numbers have taken a hit.
Nevertheless, there’s still plenty to indicate that this isn’t ContextLogic, part II. With acquisitions and partnership deals it has recently made, SKLZ is set to improve the appeal of its platform, which it monetizes through real money competitions among players. This could mean increased user engagement (i.e., more revenue from existing users), and much lower customer acquisition costs. If this happens, investor opinion on this stock could start moving back in the right direction.
It May Be Time To Play Skillz Stock
Looking at it like a value investor, Skillz may look pricey compared to names like Zynga. But if the Fed structures its tapering/interest rate changes in a way to prevent a crash in growth stock valuations, this still richly priced name may not be at risk of taking another high double-digit dive.
If, in the upcoming quarters, it can show that it’s not on the path to becoming a busted growth story? SKLZ stock could start to bounce back. Ahead of a recovery, now may be the time to buy.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
