Skillz Stock Is a Really Excellent Long-Term Speculative Buy Below $5

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Okay, maybe I’m having a bit of fun with readers. If you recall, back in November, I had an article about Skillz (NYSE:SKLZ) that said SKLZ stock was an excellent long-term speculative buy below $10. 

Skillz company logo on a website
Source: Dennis Diatel / Shutterstock.com

Now trading just under the $5 mark, it looks like Skillz stock is in a bit of an uncontrolled dive. So, is there any hope for this mobile games platform?

I think so. But given current market conditions, anything’s possible. Here’s what you should know about the stock moving forward.

Could SKLZ Stock Hit Zero?

I’m sure some people think this will happen. But realistically, if Hertz (NASDAQ:HTZ) can survive bankruptcy and trade at almost $20 less than a year later, I don’t see how SKLZ stock goes to $0. I really don’t. 

Fellow InvestorPlace contributor Chris Lau recently questioned the company’s $300 million debt offering, suggesting its 10.25% coupon was way too expensive given the company’s revenue generation. That article now has me asking two questions contradicting Lau’s take.

For one, why would Skillz dilute shareholders to the tune of 9.1% when it could easily support $31 million in annual interest payments? That 9.1% is based on $300 million divided by $8.12 — the Dec. 15, 2021 close price, when it priced the debt offering — and 408 million shares outstanding.

Secondly, why wouldn’t Skillz go after $300 million in capital when it’s growing revenue by 70% a quarter?

Let me start with this second question to begin. 

Answering Questions

Through Sept. 30, 2021, Skillz’s nine-month revenue was $275.2 million. In the company’s third-quarter report on Nov. 3, 2021, Skillz said that it expected full-year revenue of $389 million. That’s an increase of 69% year-over-year (YOY). In 2020, the company had full-year revenue of $230 million. That means Skillz expects its revenues to grow by $159 million YOY, or 5.1 times its interest payment on its new debt. 

If SKLZ stock jumps up to $20, I could see it issue enough shares to wipe out its so-called expensive debt and then go after long-term, cheaper debt. 

Now, as for the first question, I’m assuming that Lau thinks Skillz shouldn’t have done anything while its share price got eviscerated by investor malaise. 

In recent years, the worst mistake I’ve made was opening a business checking account with my local bank. After the bank manager gave me an hour-long presentation about the benefits of my account, he asked me if I wanted the instant credit that went with it. So sleepy from the boring presentation, I said no.

Never say no when someone’s offering you credit for nothing. I have no idea if he was talking about me getting my 67th Visa (NYSE:V) card — (I’m being facetious, barely) — or a line of credit, but the window shut when I walked out the door. That’s how big banks operate. They have very low attention spans.

Yes, 10.25% is expensive — but not if you can generate 70% YOY sales growth for two to three years. 

The Bottom Line on Skillz

For the nine months through the end of Q3, Skillz used $105.4 million in free cash flow (FCF). If you annualize that, it will have used $140.5 million in free cash in 2021, a significant increase from 2020.

This is why the company went after the $300 million in cash. There’s a good chance it will use more than $200 million in free cash in 2022. Having close to $1 billion in cash helps it carry on with its plans without cutting staff, among other things. That’s a major advantage.

Growth businesses can’t afford to shut off the finance tap because it’s hard to know when they’ll need an infusion. But, unfortunately — as we saw in 2008 — lack of capital kills a lot of businesses that should not go under otherwise. 

The Altman Z-Score was designed to predict whether a company would go bankrupt within 24 months. I won’t get into the details. However, any stock with a score of 3 or more is considered safe from entering bankruptcy protection. Skillz’s current score is 10.75, more than 3 times this minimum rating.

SKLZ stock might be down 83% over the past year, but that doesn’t mean investors are right about the company’s future. I thought this stock was a good buy under $10 for speculative investors. However, under $5, it’s an outright bargain. If you have nerves of steel, you ought to be buying at this level.  

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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