Why Skillz Is a Disappointment as Bears Bet Against it

Very seldom are executive departures a positive event for a company. Skillz (NYSE:SKLZ) stock sustained its slump on the markets when its technology chief resigned.

A row of people wearing matching outfits and headsets play a video game together in a room with blue lighting.
Source: NYCStock / Shutterstock.com

This re-affirms the bearish bet against SKLZ stock, with the short float at over 22%.

Why did the chief technology officer resign? Are shareholders too pessimistic about it?

SKLZ Stock Out of Favor

CTO Miriam Aguirre said she resigned from Skillz after eight years, effective on Nov. 22. This is “to prioritize her ongoing health and well being.” Executive changes are a normal part of the evolution of a business. As priorities shift, the demand for different leadership changes, too.

Skillz needs more hot games on its roadmap. While the company demonstrated revenue growth in the third quarter, it earned just 13 cents a share. It launched a mobile version of Big Buck Hunter, a first-person shooter arcade game. It also introduced new content to connect its players to Trivia Crack Payday. Yet it needs to do more.

Skillz spent heavily to acquire marketing and new users with it. It drove its cost per install (CPI) lower from the prior quarter. In addition, it invested in Exit Games to integrate advanced synchronous technology onto the its platform. This is through Exit Games’ Photon Engine. The improved multiplayer capabilities will advance support for first-person shooter and racing games for the next few years.

Investors are unwilling to wait years for results. They want Skillz to post higher profits sooner.

Gaming Stock Valuations Fall

Activision’s (NASDAQ:ATVI) controversial chief executive officer, Bobby Kotick, triggered a sell-off in its share price. ATVI stock traded close to 52-week lows as employee morale worsened. This has negative implications for Skillz because gaming stock investors may buy Activision at a discount. Zynga (NASDAQ:ZNGA) has more similarities to Skillz as a mobile electronic gaming firm. Its technical selling pressure worsened since falling in August.

On Nov. 8, Zynga posted its best third-quarter bookings of $668 million, up by 6% from last year. The growth failed to impress investors. If Zynga reported the largest mobile audience in its history but shares fell, Skills has more to prove. Still, Zynga lost 4 cents a share while Skillz is profitable.

Opportunity

Skillz bought Aarki, a demand-side platform to increase its user base. The stock is falling because shareholders are pricing the integration risks ahead. Chief Executive Officer Andrew Paradise said that the Aarki integration will take between four and eight quarters. The benefits will show up as an operating expenditure efficiency improvement. Such synergies will not add to operating profits for a while.

Investors may track Aarki’s performance by watching the CPI figures quarter. The company’s market share growth requires more members. It needs to acquire them at declining costs over time. The more the CPI falls, the more opportunity Skillz has to spend on marketing.

On the engagement marketing side, Skillz introduced a few experiments. It ran different tests and experiments to fine-tune its engagement marketing strategy. Chief Financial Officer Ian Lee said he expects monetization will continue through the fourth quarter.

Risks

Users may lose interest in the Skillz platform. This would hurt activity levels and increase the cost of growing users. The company will need to re-formulate its investments to maximize user engagement.

Skillz may report poor results from marketing initiatives set for 2022. Fortunately, the company reported growing monthly active users, up Y/Y by 47% in Q3 and at record levels. It will likely adjust its marketing approach to increase monetization rates.

Fair Value

Skillz earnings forecast
Click to Enlarge
Source: Chart courtesy of simplywall.st

Wall Street analysts did not offer a price target on Skillz in many weeks. Only six analysts offer a price target, which ranges from a low of $12 and a high of $25.

Simplywall.st reported that the analyst EPS is negative until after the fiscal year 2023.

The frothy technology sector is forgiving for start-ups that are losing money. That sentiment may change. With ATVI and ZNGA stock on sale, investors may sell Skillz and buy other gaming stocks instead.

Your Takeaway on SKLZ Stock

Skillz is a high-risk bet for growth investors. Bears have a sizable short position on the stock. They are predicting that the unfavorable valuations and negative sentiment will persist in the quarter ahead. Skillz could disappoint investors in 2022 if it fails to achieve synergies from the acquisitions.

In 2021, short-squeeze events sent stocks like Skillz to new highs. Bears may get too greedy by increasing their short position on this stock. Though the chances are low, it could still lead to another squeeze that sent the stock to a $46.30 high in February.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/11/why-sklz-stock-is-a-disappointment-as-bears-bet-against-it/.

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