I’ve been very bearish on Skillz Inc. (NYSE:SKLZ) stock for many months. I’m justified in that thinking too, as the shares have lost about 90% of their value over the past year. That said, I’m breaking slightly from my bearish attitude and think SKLZ stock may actually have some upside ahead.
However, I do think that before the shares can become a buy, the company must show that it can sharply decelerate the growth of its spending and stock-based compensation. Additionally, due to the weakening of the overall videogame sector, a trend that’s likely to continue for some time, I don’t expect SKLZ stock to rebound much until the second half of the year at the earliest.
Why Skillz Has Some Potential at Its Current Levels
Importantly, SKLZ stock is changing hands for slightly over three times its forward sales. So its price-to-sales (P/S) ratio is no longer excessive at all.
I’ve always been very bearish on the company’s esports business because of intense competition among numerous videogames. Skillz, however, does have some positive initiatives and attributes.
Specifically, it incentivizes developers to create interesting, popular games. As a result, the company is likely to benefit from many cool, interesting, innovative games created by developers.
I’m also upbeat about the outlook of some of the games offered by Skillz, including its trivia offerings, its Chess games and its Mahjong contests, all of which could attract older, more slow-paced and cerebral gamers who, I believe, are somewhat underexposed to and underserved by the videogame market. Additionally, app purchases on board games were reportedly trending in a positive direction in October 2021.
Other Reasons to Be Hopeful About SKLZ Stock
Additionally, although I think the excitement over the metaverse is overdone, I do believe that many videogame makers will benefit from the proliferation of augmented reality and virtual reality. Skillz could easily be in that group.
Finally, at its current levels, Skillz could well become a takeover target for a major company such as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) or Meta (NASDAQ:FB), all of which may very well be willing to shell out around $2 billion for Skillz. That price would be about double the current market capitalization of SKLZ stock.
Skillz Has to Get Its Spending Under Control
In the fourth quarter, the company’s total spending nearly doubled year-over-year, coming in at $213 million, versus $111 million during the same period a year earlier. Its R&D, sales and marketing, and general administrative costs all came close to doubling last quarter versus the same period a year earlier. Separately, its stock-based compensation jumped over 150% year-over-year (YOY), coming in at $60 million, versus $23.76 million during the same quarter in 2020.
And, unsurprisingly, the company’s net loss jumped to $99 million last quarter, way up from $67 million in Q4 of 2020.
Given the market’s current elevated volatility and strong aversion to unprofitable companies, I think it will be a long time before investors become interested in companies with well-established products whose net loss is ballooning due to huge spending increases.
The Bottom Line on SKLZ Stock
With the pandemic and fears of the coronavirus rapidly winding down, the videogame sector isn’t doing too well. For example, in January, “videogame content sales that fell 4%” YOY, Seeking Alpha reported.
As spring and summer roll around, releasing pent-up demand for outdoor adventures, vacations and in-person socialization, videogames’ weakness is likely to intensify.
If Skillz can get its spending under control and videogame sales come out of their slump, its shares may become a buy for speculative, long-term investors. But obviously, that’s a big “if,” which is not going to materialize anytime soon.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
