Over the last 52-weeks, it’s been a painful journey for Skillz (NASDAQ:SKLZ) stock. From highs of $46.3, the stock has slumped to a penny-stock status.
The short interest in SKLZ stock still remains high. However, it seems that there is a likelihood of a short-squeeze rally than further downside from current levels. Let’s talk about the reasons to be hopeful about the business even amidst the pessimism.
With the stock sliding, let’s first talk about the company’s balance sheet health. As of Q3 2021, Skillz reported cash and equivalents of $540.3 million.
Additionally, the company raised $300 million in senior secured notes in December 2021. Clearly, there seems to be no concern on the financial front. The company has boosted its liquidity buffer to pursue strategic growth opportunities.
The markets are looking for specific catalysts that accelerate top-line growth. I believe that’s round the corner. Of course, I would not take a big plunge in the stock, but some exposure can be considered for a sharp reversal rally.
International Expansion
One of the catalysts for growth is geographical expansion.
In January 2022, Skillz announced its entry into the Indian markets. Initially, the company will operate Diamond Strike, a Skillz-owned and operated game and platform. Based on the feedback and user experience, more games will be launched. This is likely to open-up a big revenue opportunity.
To put things into perspective, the Indian mobile gaming industry is likely to be worth $5.0 billion by 2025.
Expansion into similar high-growth markets would help Skillz accelerate its top-line. For 2020, the global mobile gaming opportunity was $86 billion. Even a 5% market share would imply revenue potential of $4.0 billion.
Cash Burn is a Concern
It’s worth noting that for Q3 2021, Skillz reported revenue growth of 70% to $102.1 million. Top-line growth has therefore been robust. However, it has failed the impress the markets.
I believe that there are two key factors that have kept the stock depressed.
First, monthly active users for Q3 2021 were 3.0 million. For the prior year comparable quarter, MAU was 2.7 million. Growth in MAU has been subdued. While the average revenue per use has grown steadily, it’s not been enough to positively impact the stock price. With expansion in India, there is a possibility for user growth.
Furthermore, for the first nine months of 2021, Skillz reported adjusted EBITDA loss of $104 million. For the prior year comparable period, adjusted EBITDA loss was $42.3 million. Cash burn has therefore accelerated. A key reason is higher sales and marketing expenses.
The concern is that higher marketing and sales expenditure has not translated into growth in monthly active users. If Skillz continues to disappoint on this front, the stock will remain depressed.
It’s also worth noting that for the first nine months of 2021, Skillz reported $30.6 million in research and development expense. On a year-on-year basis, R&D expenses have also doubled. Aggressive investment in the company’s platform is a positive long-term catalyst.
In terms of investments, Skillz closed the acquisition of advertising platform, Aarki. The company’s strategic investment in Exit Games will also support multiplayer synchronous racing, shooting and fighting games.
Considering the company’s financial flexibility, there seems to be ample scope for further strategic investments or acquisition.
Bottom Line on SKLZ Stock
SKLZ stock has been on a sustained downtrend with growth concerns and cash burn being the negative catalysts. However, it clearly seems that the selling is overdone.
The company has robust financial flexibility to pursue growth and is making inroads into new markets. Once there is some acceleration in monthly active users, SKLZ stock can trend higher.
It’s a speculative view, but considering the potential in metaverse, I would not be surprised if Skillz makes investments on that front.
Overall, the downside seems capped for SKLZ stock after a massive sell-off. However, a few positive catalysts can help the stock double from current levels.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
