Skillz Is a Speculative Bet That Will Reward the Long-Term Investor

Mobile esports platform Skillz (NYSE:SKLZ) recently reported robust-top line gains in its third-quarter results. Moreover, its underlying user metrics are improving substantially, including its monthly active and paying users. Investors with a short-term horizon on SKLZ stock, though, are likely to be disappointed as the company looks to carve out its path to profitability. Therefore, it’s best to stick with Skillz for the long haul.

A row of people wearing matching outfits and headsets play a video game together in a room with blue lighting.

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SKLZ stock has had a rocky few months. The stock has lost about 70% of its value since March. Moreover, it has significantly underperformed the market and its peers.

However, much of that is expected considering how Skillz is currently spending more money than it’s making. Nevertheless, it has multiple growth catalysts which will continue pushing it toward profitability.

Some of these include the impact of the Aarki acquisition and the continued addition of new games. Plus, its new partnership with Exit Games is making its platform more attractive to developers and could boost SKLZ stock.

Third Quarter Results

Skillz’s third-quarter earnings showed a 70% bump from the prior-year period to $102.1 million. Paying monthly active users, or PMAUs, rose 47% from the same period last year.

Moreover, the conversion rate of monthly active users (MAUs) to PMAUs during the quarter was at a healthy 17%, up 13% from the same period last year.

Gross profit during the quarter was at $94.4 million, up a staggering 66% from the prior-year period. On top of that, gross margins were at 93%, which came in just two percentage points lower from the same period last year due to the Aarki acquisition.

Sales and marketing expenses rose a massive 56% from the prior-year period to $114.5 million. Additionally, on a non-GAAP basis, sales and marketing were roughly 110% of revenue.

Its GAAP net income for the quarter increased to $50.8 million from a loss of $42.9 million in the prior-year quarter. However, the company’s adjusted EBITDA showed a hefty loss of $41.7 million, which came in $17.3 million lower than the last year due to increased marketing spending.

SKLZ Stock Is Not a Short-Term Play

Investors who are looking at SKLZ stock as a short-term investment aren’t going to be too amused. Seasonally, the fourth quarter has been the most sluggish for the company, as digital advertising prices rise usually rise during the holidays.

Moreover, whenever Skillz reduces its User Acquisition (UA) marketing costs, it shows a strong decline in new users on its platform. Consequently, stockholders then sell off SKLZ stock after being displeased with user growth numbers.

In the long run, though, the company has multiple growth drivers in scaling up its business. Firstly, it plans to offer high-caliber content in virtually every gaming category it currently offers. As it brings more games to its platform, it will significantly raise MAUs and PMAUs, which will bump the stock price in the process.

Another catalyst is its acquisition of demand-side platform Aarki for mobile apps. Aarki enables advertisers to locate places where they can effectively place their ads and bid for ad spots. This will ultimately lower marketing expenses by helping Skillz lower UA’s marketing spend.

Additionally, its partnership with Exit Games will enable developers to host synchronous multiplayer games in real-time. It could also foster relationships with major game studios such as Electronic Arts (NASDAQ:EA) and Ubisoft Entertainment (OTCMKTS:UBSFF).

The Bottom Line on SKLZ Stock

Skillz is still in its early stages of development, where it’s still looking to optimize and experiment with its business. However, it has the potential to reward investors who stick with it for the long term on the back of multiple growth drivers.

Most of these catalysts are likely to play out over two to four years. Patient investors who hold SKLZ stock for the long run will be set to reap the rewards then.

On the date of publication, Muslim 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 


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