Skillz (NYSE:SKLZ) stock was once a great opportunity to make money turning mobile games into esports and, possibly, gambling revenue. Today the company is in a more unforgiving game, a battle for survival.
Fast growing, money losing stocks are out of fashion for a reason. Capital has run away. These companies need to live on what they have.
In 2021 Skillz did deliver growth, revenue 67% ahead of 2020. But operating losses nearly tripled to $287 million, and the net loss was $181 million. SKLZ stock ended the year with $590 million in cash and marketable securities on the books.
It’s going to have to live on that.
The Skillz Story
Skillz came public through a special-purpose acquisition company (SPAC) called Flying Eagle near the end of 2020. Shares ended that day at $22.73. A story about the day featured an animated arrow pointing up.
Skllz was due to open March 7 at $2.44/share. That’s still a market capitalization of $1 billion on $384 million in revenue during 2021. It can easily get much cheaper.
Skillz calls itself a platform for competitive mobile games. Its slogan is “release your inner champion.” The games are standard fare, like solitaire, bingo, and dominoes. The twist is that Skillz organizes players and hands out cash prizes to winners. Its latest game is built around racing drones.
During the height of the pandemic, this looked like great fun. Community, competition, something to do when you can’t go out. Now you’re looking at old games topped by the chance to lose money. Reminds me of a downtown Las Vegas casino when I covered computer trade shows in the 1980s.
Lack of Skillz
Skillz got a short-term boost last June when it bought Aarki, a marketing platform, for $150 million in cash and stock. The hope was to create “the first integrated eSports advertising platform.”
Since the end of June, the stock has gone nowhere but down, losing nearly 90% of its value. It dropped by 35% in February alone.
The earnings, released Feb. 24, were a particular disappointment. Management had put $465 million into marketing the platform during the year. This grew the number of active users from 320,000 to 510,000. Analysts didn’t like the loss, and they didn’t like the company’s guidance for 2022. What I didn’t like was management’s refusal to consider changing course.
Officially, analysts haven’t walked away. There are still six following SKLZ stock at Tipranks, and four say you should buy it. Their average price target is double where it traded March 7. Three were profiled by our Eddie Pan, and they remain confident. The analyst from Citicorp (NYSE:C) said Skillz had a “pristine” balance sheet.
That balance sheet shows “marketable securities” at $319 million on Dec. 31, and long-term debt of $279 million. Unless those securities have been sold since, they’re probably worth less in March than they are now. Doesn’t look very pristine.
The Bottom Line
Skillz spent $465 million last year to gain 190,000 players. That’s almost $2,500 per new player.
Do you think Skillz will get $2,500 each from these people playing cards, dice, and drones on mobile phones? These are casino customer acquisition numbers. These are not casino games.
The answer lies in Skillz’ supplementary financial information. During the last quarter of 2021, Skillz reported $9.80 in average revenue per user (ARPU). Only about 16% of its players are paying to be on the platform. Average revenue for each paid user was $59.30.
I don’t see how you can justify spending $2,500 to get $59.30, with mobile games that were fun back in 2003. It doesn’t add up for me.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
