Skillz Stock Is a Buy After the Unjustified Selloff

Since February, some formerly “hot” sectors have turned south. In some cases, the selling made sense. In others, like Skillz (NYSE:SKLZ) stock, it has created opportunities.

A close-up shot of hands playing a video game on a mobile phone.
Source: Shutterstock

SKLZ has been hit by two trends. First, we’ve seen a number of “pandemic winners” struggle here in 2021, and particularly over the last few weeks. SKLZ stock didn’t rise during the worst of the pandemic — the company wasn’t public then — but its results benefited from “stay at home” orders, creating a potential headwind in 2021.

The weakness in big 2020 winners isn’t surprising: the market is focused on a “return to normalcy.” But it ignores the long-term benefit posed by Skillz’s performance last year.

The second external factor here is the selling in stocks that went public via the special purpose acquisition company (SPAC) process. Again, some of those selloffs made sense. We’ve seen bubbly trading in some SPAC names both before and after their mergers closed.

The pressure on SKLZ stock, however, has been immense: shares are down more than two-thirds from February highs. Simply put, that’s too much.

An Intriguing Business

Skillz’ business model seems perfectly suited for the times.

The company provides a platform for competitive, mobile gaming. Every aspect of that model is attractive.

Let’s start on the gaming front. I’ve been a bull on the industry for years, and the sector has created some of the market’s biggest winners. As devices get better, and 5G data becomes more commonplace, the experiences are only going to get better, which means demand will continue to grow.

The platform model creates high profits over the long haul. Skillz in its merger presentation highlighted gross margins of 95%. The platform also allows developers to do the heavy creative lifting, and lets users decide what the hits will be. In 2020, 36 different games generated annualized gross marketplace volume (i.e., entry fees) of over $1 million, per Skillz’s annual report.

And competition is always attractive. We’ve seen with, for instance, the rise of fantasy sports that consumers want to be a part of the action themselves. Skillz is far and away the leader in providing that opportunity in mobile games.

Excellent Fundamentals

That qualitative case has driven impressive growth.

In 2020, revenue nearly doubled, growing 92% year over year. For the first quarter of this year, Skillz guided the top line above even the highest Wall Street estimate. The $80 million projection suggests 83% growth in Q1.

What’s driving that revenue growth is a sharp increase in paying users. In Q4 FY2019, paying monthly active users totaled 177,000. In Q4 FY2020, the figure was 391,000.

The user growth is important to consider. Because like a lot of “pandemic winners” that have been sold off, investors may be forgetting a key point. The boost to 2020 results doesn’t necessarily end when the pandemic does.

A good portion of the 214,000 paying users Skillz acquired over the course of 2020 are likely to stick around. This isn’t like, say, a manufacturer of personal protective equipment whose demand is going to shrink sharply.

The strong growth projected for Q1 only underscores that point. A return to normalcy doesn’t mean Skillz’s growth suddenly comes to an end.

SKLZ Stock Sells Off

So why are investors dumping the stock?

Again, broader trends are a factor. So, too, are short sellers. SKLZ has been the subject of a number of bearish reports of late, which may have induced some investors to exit after a huge rally.

I’m not going to wade into the charged debate over the role of short sellers in the market. But what I would say is that SKLZ stock highlights the fact that they can be valuable to long-term investors. Either they make a compelling case that brings new information to the market — or, if they’re wrong, they create a more attractive entry point.

We’ve got that more attractive entry point. And while Skillz isn’t profitable, it shouldn’t be. The company is investing to acquire new users that will provide big profits (remember, 95% gross margins) over the long haul.

Indeed, Skillz’s own chief executive officer Andrew Paradise made precisely this point in a public post this month. He noted that marketing investments historically had paid off in a hurry. Estimated value is about 3.8x estimated acquisition cost for paying users. In that context, focusing on short-term profit — which Skillz could do — would not be wise.

Intriguingly, Paradise also raised the possibility of Skillz expanding its platform beyond gaming. Exercise and education are potential verticals.

However this plays out, it’s quite clear that Skillz has tremendous growth potential. Investors saw that potential in February. Amid swirling worries in April, they’ve lost sight.

That will change as long as Skillz continues to execute and continues to grow. This selloff is an opportunity.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.  

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