Skillz Stock Lacks Upside Potential Despite Low Share Price

  • Despite being in the business of providing skill-based games, investing in Skillz (SKLZ) stock is more a game of luck.
  • In terms of risk/return, the odds are out of your favor.
  • While it has a low share price, there's not enough upside potential, making it a stock to avoid.
SKLZ stock - Skillz Stock Lacks Upside Potential Despite Low Share Price

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Don’t let its corporate name fool you. While Skillz (NYSE:SKLZ) may be in the business of operating an online real money competition platform for skill-based games, investing in SKLZ stock is almost entirely a game of luck.

The reason? Put simply, it’s hard to see it making a comeback. Unless, some good fortune makes its way out of left field. I’m not saying this can’t happen. In theory, it’s possible the company finally moves beyond its flawed business model, and is able to maintain a steady user base, as opposed to offering costly promotions, which attract users but at the same time result in high customer churn.

Yet is it probable this happens? Not really, given how its turnaround efforts have panned out so far. While its low stock price may make it seem like a tempting moonshot play, it’s not. Stay away.

Ticker Company Recent Price
SKLZ Skillz $1.27

SKLZ Stock: The Odds Aren’t in Your Favor

Trading for just over $1 per share, a far cry from the $43.72 per share it commanded at the height of the early 2021 “meme stock” boom, I can see why some risk-hungry investors are still interested in possibly rolling the dice with Skillz shares.

Down more than 97%, you may think that even a partial rebound could result in big returns for SKLZ stock. A move back to $2.82 per share would double your money. A move to $7 per share would be a 5x gain. However, looking at the facts, it seems more likely the stock will fall further in price than hit past price levels again.

Why? The market conditions that enabled it to trade for substantially higher prices are over. When it first debuted in late 2020, it did so at a time where “growth at any price” was in vogue. The company was also able to spin a narrative of it “disrupting” the mobile gaming industry.

Flash forward to now. Market conditions have become highly unfavorable to growth stocks. More importantly, the company’s results over the past year have soured sentiment that its “disruptive” business model is a winning one.

Cost Cutting Alone Isn’t Saving Skillz

The tremendous downturn in growth stocks has played a big role in the high double-digit decline in the SKLZ stock price. However, the company’s poor operating results have been the main driver of the decline.

In hindsight, it’s clear this company’s original growth strategy was not sustainable. In a nutshell, Skillz was only able to produce strong revenue growth, by spending heavily upfront, worrying about making a profit later. For some startup success stories, such a strategy has proven successful. This is one of the cases where it has failed to do so.

This strategy has brought people in, but few of these customers have stuck around. Churn has remained high. Instead of narrowing, its losses grew in line with its revenue growth. Yes, management is currently at work to fix this situation. (It has slashed the company’s marketing costs).

The issue is that this isn’t going to immediately translate into material margin improvement. Analysts forecast it to report big losses this year, next year and in 2024. Admittedly, there is something, outside of cost cutting, that could help it turn around the ship. The problem? It’s something that’s hard to handicap.

The Best Move Now With SKLZ Stock

So, what could in theory help the situation here improve dramatically? The release of higher-quality, more appealing games on its platform. This could bring in new users, and make up for its scaling back of promotional offers.

Still, it’s hard to anticipate Skillz pulling this off. Although sitting on a large cash position ($484.1 million), its financial resources pale in comparison to its larger peers. These larger mobile gaming companies have the means to invest heavily into new game development.

That’s not to say this underdog can’t wind up coming up with a blockbuster game. It’s just that hoping that it happens due to sheer luck is hardly a wise rationale to make an investment. More likely, the company will continue to report big losses, burn through cash and fall further in price.

With its upside potential limited, avoid SKLZ stock … even as a moonshot play.

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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.

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