Skillz (NYSE:SKLZ) is having a horrible year. After its latest financial results were released on Feb. 23, the company’s profit outlook has simply not improved. That leaves nowhere for SKLZ stock to go but down from here.
The stock has been on a roller coaster, except lately it is only on the down leg. From a peak in the $12 range in November, it opened today at $2.29.
Now, there is concern that the stock could fall to $1.00 or even lower, making it a penny stock. There really seems to be nothing holding up the stock going forward.
Where Things Stand With Skillz
I have forewarned about this. I wrote extensively about the huge marketing expenses that Skillz is paying out. In fact, just look at the income statement for the fourth quarter (Q4). It shows that revenue was $108.8 million and sales and marketing were $155.1 million. You can see this in the figure on the right.
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So, you can see there is simply no way that the company can operate profitably this way. It still has to cover overhead, research and development (R&D), changes in working capital, as well as capital expenditures.
For example, I calculate that the cash burn during the quarter was about $78 million. The way to do this is to compare the cash flow from operations at the end of Q4 and Q3, minus capex spending in both quarters.
For example, the total cash flow from operations in Q4 was an outflow of $180.1 million. After an additional $3.236 million, the cash burn for the year was $183.39. But the same figures taken from Skill’s Q3 cash flow statement showed a cash burn of $105.39 million.
The difference between the two is $78 million. That represents 71.7% of its $108.8 million in revenue generated during the quarter.
This is not sustainable. For example, on an annualized basis, that works out to $312 million. That is almost half of the $743 million in cash and securities on the balance sheet. In fact, after deducting $55.6 million in non-marketable equity securities, the liquid cash is only $687.4 million.
So, in one year, Skillz will have just $375.4 million left. By then, SKLZ stock will not be at the price it is now. It will be much lower.
What to do With SKLZ Stock
Analysts don’t really agree with me on this. They continue to see a higher stock price for SKLZ stock. For example, 6 analysts surveyed by TipRanks have written on the stock in the last 3 months. Their average price target is $4.92 per share.
Moreover, Yahoo! Finance also reports that 7 analysts have an average price target of $4.64 per share. So, both of these price predictions are over twice that of the present price for SKLZ stock.
It is almost as if they don’t realize that the company is stuck in a situation where to gain revenue it has to pay out huge incentives. The marketing expenses it has are what it uses to entice people to play the various games that it manages.
Moreover, the company’s revenue guidance for 2022 was for $400 million. That is only marginally over the $384 million in revenue it made during 2021. In other words, Skillz will not be able to grow out of this fundamental problem with scale.
It has to figure out how to lower its cost of doing business somehow. Expenses have to get below revenue. That is the first job of management. If they can’t do this, there is nowhere for the stock to go but down. Investors should take this into consideration when thinking about buying SKLZ stock. Those who already own it might want to reassess their situation.
On the date of publication, Mark Hake 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.
