Down another 40% in the past month, Skillz (NYSE:SKLZ) remains one of the biggest victims of the growth stock wipeout. Once trading for prices north of $40 per share, SKLZ stock is deep in penny stock territory, changing hands for around $2.50 per share.
As I called it a “worthwhile moonshot” at around $4 per share, shortly before its latest plunge, you may be wondering what my take is now on the company, which operates a mobile gaming platform that hosts real money competitions among players. In my defense, I did say that it did have room to fall. At the time, it was trading at a big premium to other mobile gaming stocks.
That said, giving things a second look, I will admit that “winning” with Skillz may be an impossible feat. It’s still debatable whether its business model is viable. Right now, it seems doomed to lose money. No matter whether it keeps its foot on the gas in terms of scaling up the business, or if it hits the brakes, and focuses on getting out of the red.
At least, based on its recent updates to guidance. Now, there may be a silver lining. Investors getting in today may have a path to profits. Even so, you may just want to skip it altogether.
Is it ‘Game Over’ for SKLZ Stock?
Take a look at a stock chart, and you may presume that Skillz’s hard drop from $4 to $2.50 per share is a product of the latest stock market sell-off. Yet while Russia’s war with Ukraine is adding to the market’s volatility, that’s not the main reason why we’ve seen this “cheap” stock get even cheaper.
Instead, it was its earnings report last month that drove the latest double-digit percentage decline with SKLZ stock. For the December quarter, the mobile gaming platform operator missed slightly on earnings ($108.85 million, versus $114 million consensus), and reported wider-than-expected losses.
But it wasn’t the earning report itself that drove the big dive. Instead, it was management’s guidance update for the full year 2022. Guiding for $400 million in sales, versus consensus estimates calling for $548.78 million, this caused major disappointment. Especially as, despite this big drop in revenue growth being the result of it cutting back on marketing spend, operating losses (as measured by the adjusted EBITDA metric) stand to come in very high this year.
Skillz reported adjusted EBITDA margins of -47% for 2021. Despite the big cut in costs (at the expense of additional revenue), it expects adjusted EBITDA margins of -37% for the full year. Even by year’s end (Q4 2022), it only sees this figure drop to -30%. In short, the company has gone from losing money, with the hope of making it up in volume, to losing money, all while its operation shrivels up in size.
A Possible Path to Profits for Investors Buying in Today
For investors who got in between $4 per share, and its above-mentioned highs above $40 per share, it may be too late to profit with SKLZ stock.
Yet if you’ve stayed on the sidelines the whole time, is it a diamond in the rough? Or is it still a falling knife, like many of the busted growth plays out there? My past bullishness on it notwithstanding, I’m leaning towards the latter. However, there may be a path for it to rally again, to a price where getting in at $2.50 per share (or less) is worth it.
Alas, it’s not exactly the sort of catalyst you want to bank on. Instead, it’s the type of thing that helps to bolster a bull case, it shouldn’t be the sole reason for buying it. I’m talking about Skillz’s potential as a takeover target. Now, you may be wondering, with high negative margins, who would want it.
But keep in mind that it no longer trades at such a high multiple of its sales. A strategic buyer could offer to buy it at a premium, and still get it a reasonable price. As for its lack of profitability? Integrated within a larger enterprise, it would be able to slash its overhead costs. Add in other synergies, and improved monetization, and it could become a profitable subsidiary, instead of being a very unprofitable independent company.
The Verdict: Put Skillz in The ‘Skip it’ Pile
I could see a scenario where, out of left field, a larger competitor offers $3.50 or $4 per share for Skillz. But outside of that, it may truly be “game over” here.
Instead of bottom fishing in SKLZ stock in the hope it gets bought out/the situation improves, you may want to just avoid it completely.
On the date of publication, Thomas Niel 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.
