In February 2021, Skillz (NYSE:SKLZ) stock touched highs of $46.3. Ever since, there has been lack of good news and SKLZ stock has remained in a downtrend. At $10.9., the stock does look oversold in the near-term. However, I believe that a strong break-out rally is unlikely.
Let’s talk about the reasons to be bearish.
Talking about undervaluation, the company’s CEO Andrew Paradise recently purchased 432,105 shares at an average price of $11.5. This was a catalyst for a rally, which was short lived.
It’s also worth noting that for Q3 2021, Skillz reported revenue growth of 70% to $102.1 million. This was primarily driven by a 47% growth in paying monthly active users. Strong top-line growth also failed to impress the markets.
The Big Concerns
There are two factors that seem to be worrying the markets.
First, for the first nine months of 2021, Skillz reported sales and marketing expense of $311 million. For the prior year comparable period, the expenses were $172 million. However, the big jump in expenses has not translated into any meaningful upside in monthly active users. At the end of Q3 2020, Skillz reported 2.6 million monthly active users. For Q3 2021, the number of MAUs were marginally higher at 3.0 million.
Further, for the first nine months of 2021, Skillz reported adjusted EBITDA loss of $104 million. This would imply an annualized adjusted EBITDA loss of $140 to $150 million. Skillz reported $540.3 million in cash as of Q3 2021. However, the cash buffer is unlikely to suffice for cash burn and aggressive marketing expenses. At some point of time, Skillz needs to dilute equity. However, if user growth is depressed, raising funds might be a challenge. Of course, Skillz has no debt and leveraging is an option. The markets will however remain unimpressed as long as user growth is subdued.
A Glimmer of Hope
It’s clear that the concerns are dominating the sentiment for SKLZ stock. However, I believe that some exposure can still be considered. Once these headwinds wane, investors can consider holding a bigger bag of the stock.
Let me talk about some of the positives.
The company’s paying monthly active users touched 0.509 million as of Q3 2021. At the same time, the average revenue per paying user increased to $66.82. On a year-on-year basis, the ARPU increased by 11.9%. The trend in ARPU is positive. If this is associated with strong growth in active users, the stock is likely to trend higher.
Recently, Skillz completed a $50 million investment in Exit Games. The latter has a multi-player synchronous game engine. This will allow Skillz to support first-person shooter and racing games. It’s worth noting that the mobile gaming market is worth $86 billion. Through introduction of new content and strategic investments, Skillz has ample scope for growth.
In another important development, Vatsal Bhardwaj joined Skillz as Chief Product Officer. Vatsal comes from Amazon (NASDAQ:AMZN) and was responsible for “developing new services to transform how largescale multiplayer games are developed, operated, scaled, and distributed using the cloud.”
Therefore, I would not completely write-off Skillz. But I would not suggest a big exposure, given the uncertainties.
Even with the cash burn, Skillz still has a strong balance sheet. In June 2021, the company acquired Aarki to form the first integrated e-sports platform. The impact of the acquisition is likely to be seen in 2022. I believe that Skillz is likely to pursue further acquisitions to accelerate user growth.
Skillz is still at an early growth stage. However, the company claims to have generated 58% higher engagement than the top mobile game in 2020. User engagement coupled with average revenue per paying user are key highlights. Once active user addition gains traction, SKLZ stock is likely to surge higher.
For now, it makes sense to consider limited exposure and keep the stock under radar for a bigger plunge.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.