For one thing, in recent months — in-line with my previous expectations — the stock has tumbled. In fact, as of Jan. 26, the shares have sunk more than 40% just in the month of January. They’ve also lost 60% over the previous three months and a bruising 85% in the last one year.
As such, the valuation of SKLZ is undoubtedly much less onerous than it was even a month ago. What’s more, the company is embracing a few strategies and a number of attributes that I view favorably.
On the other hand, though, competition may soon become more intense. There are also a couple macrotrends that will likely hinder the stock. Plus, shares are still not cheap. So, let’s take a look at this name’s strengths and weaknesses in more detail.
SKLZ Stock: A Number of Strengths and Some Good Moves
For one, the decision to buy Aarki — an adtech company that utilizes machine learning, a form of artificial intelligence (AI) — was a positive development for SKLZ stock. Companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Roku (NASDAQ:ROKU) have benefited meaningfully from making similar acquisitions.
For example, I don’t think it’s purely coincidental that Roku’s profitability and overall results really took off in the years after it bought adtech company Dataxu in 2019. In a statement at the time of the deal, executive Scott Rosenberg promised the transaction would “deliver better results” for marketers.
Since that deal closed in late 2019, Roku’s ad revenue growth has accelerated tremendously. I do think the deal has been part of the reason for that. So, Skillz’s acquisition of Aarki could enable similar ad sales growth.
On top of this, fellow InvestorPlace contributor Muslim Farooque recently noted that Skillz “acts as a bridge between gamers and developers.” I believe that the company’s extensive utilization of developers enables it to create enticing features for its games. That may eventually enable the company to gain a significant amount of market share.
To that end, according to InvestorPlace contributor Chris Lau, one Skillz title called Trivia Crack is “the No. 1 trivia game in the world with 40 million monthly active users.” That success is certainly positive for both the company and SKLZ stock.
Skillz Still Has Small Weaknesses and Macro Hurdles
Still, in terms of competition, the situation here may deteriorate in a year or so. That’s because Microsoft (NASDAQ:MSFT) recently announced it has reached a deal to acquire Activision Blizzard (NASDAQ:ATVI). The combination of Microsoft’s augmented reality (AR) technology and huge cash hoard, along with Activision’s video-game-making expertise, will make the company even tougher to beat in the sector.
Moreover, echoing my past columns on SKLZ stock, I continue to be bearish on the revenue-generating potential of the e-sports phenomenon.
On the macro front, video game sales slid 10% year-over-year (YOY) in November and 1% YOY in December. That suggests that the easing of the pandemic is having a negative impact on game sales and usage. With the pandemic likely to ease further going forward, lower utilization of video games could very well be an important negative catalyst for the company and its shares.
Additionally, once more on the macro side, the Street is less-than-thrilled with tech stocks that are deep in the red. On average, analysts expect Skillz to generate an earnings per share (EPS) loss of 37 cents in 2021 and a loss of 49 cents in 2022.
Skillz is in that “in the red” category. Even more worrisome is that, when it comes to cash flow, the company appears to be heading in the wrong direction. In the third quarter, its EBITDA (excluding certain items) dropped $17.3 million YOY, coming in at a loss of $41.7 million.
In his Dec. 27 column, fellow InvestorPlace contributor Ian Bezek noted that Skillz spent $113 million on sales and marketing expenses in Q3 to generate $102 million of revenue. In an environment in which profits are prized, the company is definitely not delivering the goods.
The Bottom Line on SKLZ Stock
Shares of SKLZ stock are certainly much cheaper than they used to be. But, trading at a forward price-sales (P/S) ratio of nearly 5 times, they aren’t exactly cheap yet.
In light of all of the points that I have explored, I continue to believe that — although the outlook of Skillz has improved — the company’s weaknesses and threats still outweigh its current strengths and opportunities. Therefore, I think SKLZ shares will prove to be a falling knife. I continue to advise investors to sell the stock.
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On the date of publication, Larry Ramer did not hold (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.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Ford, solar stocks, and Exxon. You can reach him on StockTwits at @larryramer.