I usually don’t get a chance to see my fellow InvestorPlace contributors’ genius in action as it pertains to trading tactics. Therefore, when an opportunity comes up, I’m going to take it. Recently, I had a chance to review my colleague Nicolas Chahine’s take on Skillz (NYSE:SKLZ), an online multiplayer video game platform. Chahine couldn’t have called SKLZ stock any better.
It didn’t initially start off that way. In fact, Chahine warned readers that SKLZ stock was running out of extra lives.
Entering the capital market via a merger with a special-purpose acquisition company, the gaming platform initially jumped higher thanks to the early boost of enthusiasm that typically follows SPACs.
At a closing price just shy of $44, SKLZ stock managed to deliver more than 4X gains for those who bought at the original offering price of $10 — the typical starting point for SPACs. However, the air came out of the bubble, leading shares much lower.
And that was what Chahine was alluding to. Sure, the SPAC that facilitated the deal for SKLZ stock comprised the same team that brought us DraftKings (NASDAQ:DKNG), one of the few shining examples of post-merger SPACs that have lived up to the hype. However, he mentioned that the onus was up to management to “prove to investors that it is worthy of the risk.”
The onus is not on the investor to recklessly ignore risk and “diamond hands” their way through extreme volatility … possibly on the way to catastrophic losses. Therefore, for Chahine to be interested, he mentioned that he would need to pace a “stern stop loss” below $8 per share.
As it turned out, SKLZ stock never closed below $8.05. And over the trailing month since the Nov. 1 session, shares have gained nearly 34%.
Can You Trust the Ride in SKLZ Stock?
From the technical data, the evidence points to SKLZ stock having potentially bottomed in early October. However, the investment itself remains a speculative wager. Is the present sentiment enough to justify taking a shot?
Unfortunately, I don’t have the benefit of knowing what will take place for its upcoming third-quarter earnings report, scheduled for a Nov. 3 release. However, word on the street is that Skillz has likely benefited from an increased number of paying monthly active users and enhanced player retention plans.
You’ll recall that in Q2, the company’s streak of consecutively rising paying MAUs — seven quarters to be exact — took an unceremonious end. True, the miss was quite small but it was enough to send a message. From investors’ perspective, SKLZ stock benefitted from the pandemic-fueled lockdowns. Now that society is gradually returning to normal, other entertainment sources are now competing for consumer attention and dollars.
Therefore, if paying MAUs rise as per covering analysts’ expectations, it’s very possible that SKLZ stock will jump higher. As well, a popular game called Big Buck Hunter launched on the Skillz platform in late September. Should this game demonstrate a positive impact to MAUs, this catalyst can also drive up shares.
Combined with the broader sentiment for speculative affairs — just look at the rise of cryptocurrencies — encouraging data in the MAU space could be more than enough. Still, prospective buyers should be aware of fundamental risks.
Mainly, management has to signal a focus or commitment to keeping costs and expenses under control. While the company has performed an all-out blitz regarding its marketing machinery, Skillz cannot keep posting operating expenses that consistently rise above revenue. At some point, it needs to figure out a way to attract new players in a cost-effective manner.
Attractive for the Near Term
If you’re interested in SKLZ stock, I think the evidence is on your side if you’re looking at a nearer-term (and short-term) play. The broader sentiment is appealing as is the real possibility of encouraging MAU numbers for Q3.
However, a longer-term investment is a different framework. At the end of the day, investors plunk their hard-earned cash into companies that demonstrate profitability. Obviously, running expenses well above the top line is not a viable path to boosting the bottom line. Ultimately, your approach to SKLZ will depend on what exactly you’re looking to do with your risk capital.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.