- Skillz (SKLZ) reported its latest quarterly results on May 4.
- The company continues to make little progress fixing its key issue: an unclear path to profitability.
- Although in turnaround mode, this will do little to get the stock moving in the right direction anytime soon.
Since I last wrote about it in April, the situation with mobile gaming company Skillz (NYSE:SKLZ) has gotten worse. Yes, market volatility has been a major reason behind the continued decline in the price of SKLZ stock. Growth stocks, especially shares in growth stocks that are not yet profitable, are the last thing many investors want to own right now.
But besides market conditions, another round of poor results have played a role in this mobile gaming company’s drop below $2 per share. Earlier this month, it reported wider-than-expected losses. While at work to get itself on the path to “profitable growth,” it’s a long way away from getting there.
There’s little to signal things are improving. Couple this with a stock market where growth plays are falling more out of favor, and I wouldn’t expect shares to make a sustained move higher anytime soon.
SKLZ and its Latest Earnings Report
Skillz reported its latest quarterly results on May 4. Revenue for the quarter came in at around $93.4 million. This was slightly ahead of analyst estimates. Its bottom line results, however, came in short of expectations. The sell-side was expecting GAAP losses of 19 cents per share.
Instead, it reported GAAP losses of 37 cents per share. While much of this additional loss can be attributed to a one-time stock-based compensation expense, losses for the quarter were wider than expected.
As I’ve argued in past coverage of SKLZ stock, the company continues to make little progress in resolving its key issue. That would be its unclear path to profitability. Up until recently, the company’s strategy was to spend heavily on marketing and promotions in order to attract users to its cash competition-based platform. This enabled it to report high sales growth.
But while its sales were going up, so were its losses. Some early-stage companies have successfully spent heavily upfront to attract long-time users. Not Skillz. Instead, it has seen heavy customer churn. It spends heavily up front to attract users, users sign up, but then fail to provide enough revenue to cover customer acquisition costs.
Having a Plan isn’t Enough
Skillz isn’t ignorant of the fact that its business model isn’t sustainable. That’s why it’s currently in overhaul mode. For months, it has been at work revamping its business plan. Even in the press release that accompanied its latest earnings, management put a “glass half full” spin to things. It touted that the company is “paving a path to profitable growth.”
Yet, while paving a path is better than taking no action, getting on the path is what’s important here. In other words, getting to the point where it starts to really narrow its negative operating margins and gets out of the red.
Last quarter, it made little progress doing this. A serious narrowing of losses isn’t likely to happen in the coming quarters either. While it’s slashing its marketing/promotion spend, this isn’t set to translate into big margin improvement. For the full-year 2022, it only expects its operating margins (as measured by adjusted EBITDA) to go from negative 47% to negative 37%.
Although it is making moves to retain users and lower its dependency on marketing spend, like providing better games and monetization through advertising, cash burn is likely to continue.
Bottom Line on SKLZ Stock
Skillz has enough in the tank to stay afloat for now. As of Mar. 31, it had $484.1 million in cash and short-term investments. However, if it continues to struggle improving its margins, it will likely need to raise more cash.
Forced to borrow at high interest rates even during the more “risk-on” times of 2021, you can imagine how much harder obtaining financing will be in today’s challenging market environment.
Earning an “F” rating in my Portfolio Grader, it’s hard seeing this stock making a real recovery anytime soon. In fact, it’s more likely this stock, despite its low price, is heading lower from here. Continued cash burn plus further negativity about growth stocks will likely put more pressure on SKLZ stock from here. As it has been the case for months, your best course of action is to steer clear of shares.
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On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.