What Happened to the Skillz Stock Price Today?
- Shares of mobile esports technology company Skillz (NYSE:SKLZ) have been on a multi-week downtrend, wherein SKLZ stock has dropped from over $45, to $12 in a matter of two months. But SKLZ stock reversed course sharply on Wednesday, when shares popped nearly 30%.
Why It Happened
- SKLZ stock has been the subject of two big short-seller attacks over the past two months. The most recent attack, from Eagle Eye Research, claimed that Skillz was inflating its revenues by ~50% through the use of fictionalized “Bonus Cash,” which the company gives to users to use as entry fees into competitions (and which company then proceeds to record as revenue).
- The market didn’t think the report held much weight, and traders seem to be taking this short report as bears getting too comfortable.
- So, shorts appears to be covering and retail traders appear to be moving back into the name. SKLZ stock is popping and in the midst of its best day ever.
Will the Skillz Short Report Matter Long-Term?
- The short report points out some interesting accounting gimmicks. But they don’t really matter in the big scheme of things.
- That’s because companies are valued on profits — not revenues — and Skillz accounts for these “Bonus Cash” incentives in its sales and marketing line.
- In other words, these incentives are netted out by the time you get to the all-important EBITDA line, which is what the market uses to value the company.
- Also, Skillz is 100% transparent about this accounting in its 10-K filing. There is no secrecy or hidden agenda here. The 10-K clearly states that the company uses incentives such as Bonus Cash and discounts on entry fees to juice engagement, and accounts for some of those incentives (the entry fee discounts) before the revenue line while accounting for other incentives (the Bonus Cash) after the revenue line. Either way, they both get taken out by the time you hit profits.
- Even after accounting for all of those incentives, Skillz’ Lifetime-Value-to-Customer-Acquisition-Cost (LTV/CAC) ratio is 2.5X, meaning the incentives are working to drive incremental gross profits to the business.
- To be sure, the company has not been able to lever Bonus Cash incentives in recent years. From 2017 to 2020, Bonus Cash incentives as a percent of revenue have consistently hovered around 40%.
- But the company has been able to lever all other opex lines, including research & development and general & administrative.
- Even if Bonus Cash incentives forever remain 40% of revenues, economies of scale and a huge revenue base will enable Skillz to report enormous EBITDA numbers in the long haul.
SKLZ Stock Price Forecast
- The math here is simple:
- Skillz operates at 95% gross margins. Take out 40% for Bonus Cash incentives. Say the R&D rate — currently 10% — drops to 5%. Say the G&A rate — currently 18% — drops to 10%. Say the non-incentive S&M rate — currently 70% — drops to a more normal 15%. You’re talking a total opex base of 70%.
- Now, let’s assume stock comp runs about 5% of revenues, which is fairly reasonable.
- 95% gross margins (-) 70% opex rate (+) 5% stock comp (=) 30% adjusted EBITDA margins. That’s assume to leverage on the incentive line. Any leverage there will result in 30%-plus EBITDA margins.
- 30% is the exact adjusted EBITDA margin Skillz management is targeting in the long run.
- We think that’s entirely doable.
- We also think that Skillz has an opportunity grow its revenues by more than ten-fold over the next decade, from ~$370 million this year to over $4 billion by 2030.
- On those assumptions, we believe SKLZ stock is worth over $40 today.
Skillz stock belongs in a basket of high-quality, hypergrowth stocks with a ton of long-term potential that has been beaten and bruised over the past few weeks as the market has turned its back on early-stage growth companies.
Now is the time to buy these stocks.
Many of these stocks are deeply oversold, have 100%-plus upside potential from current levels, and the tide appears to be turning back into their favor.
SKLZ stock is just one of dozens of stocks out there that could give you big returns from current levels over the next few months and years. The others? Well, we have created a portfolio of stocks which we think represent the most innovative, most exciting early-stage tech stocks in the market with big-time upside potential.
To get the names, ticker symbols, and key business details of those potential 10X winners, click here.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.