Skillz (NYSE:SKLZ) stock didn’t take much of a licking after it released unimpressive third-quarter results on Nov. 3.
The major news coming out of the earnings report was how much the online gaming company is spending on marketing expenses, 112% of revenue to be precise.
Naturally, the earnings report is not why SKLZ stock has been doing so well lately.
The appointment of Vatsal Bhardwaj as the company’s Chief Product Officer will have a lot to do with this success. He brings experience in leading and managing teams, having previously served as Amazon Web Services (AWS) Game Tech Director.
However, that does not explain why shares are up around 35% in a single month. That has mostly to do with the meme stock status.
To its credit, the company launched a public offering of 32 million Class A shares to take advantage of the surge in stock price.
However, now that the pandemic is over, investors want more catalysts. And with the runup in share price, this stock is firmly in the overvalued category.
SKLZ Stock Price Action Show Inherent Volatility
If you take a look at the three-month price chart for SKLZ, you will find a striking inverse head and shoulders, also called a “head and shoulders bottom,” has emerged, which is a bullish sign.
After the stock was languishing near $8, bulls took control and drove up the price, and shares are back to where they were a few months ago, which is trading under $12.
It’s a tight range where buying and selling pressure are meeting. However, there has been a breakout above this level since August.
Hence, it is a tough ask for bulls to do so.
It could happen if SKLZ stock provides them with near-term catalysts. At the moment, they seem far and few between.
The third-quarter earnings did not provide much fodder for bulls. Revenue came to $102 million, a year-on-year increase of 70%. That is not bad.
The company ended up spending approximately $115 million on sales and marketing costs. It’s a strategy the company has been pursuing for a while.
Year to date, Skillz spent $310 million on marketing despite revenues of only $275 million. The only bright spot is that paying monthly active users (PMAU) is on the rise. The total has grown sequentially to 509,000 from 463,000 users, largely thanks to the popular Big Buck Hunter game.
It also highlights a larger issue of whether this business model is enticing. The company is too reliant on a few game releases for most of its revenue.
Skillz revealed that in the nine months ending Sept. 30, 2020, nearly two-thirds of its income came from Tether Studios, known for its work on Solitare Cube and 21 Blitz games. In addition, another major contributor is its Blackout Bingo game from Big Run Studios.
Flip Side of the Argument
Although the business model is cause for concern, Skillz believes it operates similar to yesteryear’s Netflix (NASDAQ:NFLX).
At that time, Netflix did not create content; instead, it relied on studio releases. If a title gained traction on the application, the company was quick to promote it. The movie or series was bringing eyeballs to the product.
The same case is with SKLZ. If a game is successful, the company will promote the title. That does not go against the company.
Neither Skillz’s CEO Andrew Paradise nor the management has not indicated whether they want to set up a company to make their games.
Nevertheless, they are taking a lot of the capital amassed and investing it wisely. For example, it spent $150 million acquiring ad-tech company Aarki. It is an AI-enabled mobile marketing platform that engages in over five trillion monthly advertising auctions using Big Data and AI.
SKLZ Stock Is Overvalued
There are things to like about SKLZ stock. In many ways, it is the Netflix of gaming. Considering the future of esports, it is a good long-term investment.
Legendary investor Cathie Wood also agrees with the sentiment, which is why she purchased 2.1 million shares of Skillz recently. However, at current price multiples, the potential is already priced in.
In case of a dip, it is a worthy investment for those looking to future-proof their portfolio.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.