To say Skillz (NYSE:SKLZ) has disappointed investors is an understatement. After plunging nearly 81% in the last six months, it seems SKLZ stock is struggling to survive. The price action speaks more to the business’s outlook than management’s guidance. The company’s leadership needs to find ways to survive and grow.
However, I am also reminded of Nio (NYSE:NIO) when it traded below $2 in 2019. Once the company overcame financing concerns and growth accelerated, NIO stock touched highs of $62.80 on a closing basis.
At current levels of $2.15, SKLZ stock is a gamble. If the business does deliver a surprise turnaround, the stock will deliver multi-fold returns. It’s a risk worth taking at current levels. Of course, it makes sense to hold a small bag that does not translate into any meaningful capital erosion for your portfolio.
Possible Positive Catalysts for SKLZ Stock
I still believe Skillz can come out of the woods. The first positive to note is the company does not face any balance sheet concerns. As of the fourth quarter of 2021, the company reported cash and equivalents of $743 million. This can be deployed for organic and inorganic growth.
It’s also worth noting monthly active user (MAU) growth has been challenging. In Q4, the number of MAUs was 3 million. On a year-over-year (YOY) basis, active user growth was 15%. This is dismal for an early-growth company that has a big addressable market.
However, the good news is the company’s average revenue per paying user (ARPU) has been trending higher. For 2021, the ARPU was $62.40.
For Q4, revenue increased by 61% YOY. Revenue growth has still been healthy due to improvements in ARPU. This metric can take SKLZ stock higher if it’s paired with growth in MAUs.
Additionally, Skillz recently launched a live pilot in India. It believes the new venture is unlikely to meaningfully contribute to growth in 2022. However, Skillz plans to expand to other countries as well. With a wider addressable market, there is scope for growth.
As management points out, it’s all about having a “blockbuster game on Skillz.” That’s impossible to predict. However, if it does happen, it would take little time for SKLZ stock to deliver multifold returns. Clearly, there is a thin line between success and failure for Skillz.
Markets Will Consider Cost Concerns
There are few positives to talk about regarding SKLZ stock, as it has been in a sustained downturn. The company commands a market capitalization of just more than $1.3 billion.
A key reason for this is cash burn without impact on some key metrics. In 2021, Skillz reported sales and marketing expense of $465 million, an increase of 85% YOY. However, there was no meaningful impact on active user growth. Similarly, general and administrative expenses tripled YOY to $135 million.
It seems difficult for the company to justify these expenses to the markets, especially when core growth metrics look dismal. For 2021, Skillz reported adjusted EBITDA loss of $182 million.
If cash burn concerns sustain, SKLZ stock might find it difficult to rally, even from deeply oversold levels.
Concluding Views on SKLZ Stock
For 2022, Skillz has guided for revenue of $400 million. This does not include any potential upside from new content, which is unpredictable. Assuming this guidance holds true, the company’s top-line growth will be muted.
However, Skillz has also guided for adjusted EBITDA margin improvement of 10 percentage points. If the cash burn can be curbed in 2022 and beyond, the markets are likely to respond positively. Skillz expects to break even on its EBITDA by 2024.
Overall, SKLZ stock is a speculative bet at current levels. One blockbuster game can translate into multifold returns. However, I would not take the risk of betting big on the stock, even after an 80% decline in the last six months.
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On the date of publication, Faisal Humayun 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.
