Why Is Everyone Talking About Skillz Stock?

Skillz (NYSE: SKLZ) has been a battlefield stock since its public debut last December. The gaming services company’s stock opened at $ 17.89 per share on its first day of trading, rose to $ 46.30 in February during the “meme stock” frenzy, and then fell back into mid-teens.

Let’s see why Skillz has drawn so much attention from the bulls and bears, and where its volatile stock might be headed.

SPACs are checked

Skillz didn’t go public through a traditional IPO or direct listing. Instead, it agreed to be used by a publicly traded SPAC (Special Purpose Acquisition Company) called Flying Eagle Acquisition Corp. to be taken over. Flying Eagle investors received new shares in Skillz upon completion of the merger.

Image source: Getty Images.

SPAC-backed IPOs often draw a lot of attention and scrutiny. The cops claim they are democratizing the IPO process by allowing retail investors to purchase shares of a publicly traded SPAC before it merges with a privately held target. In theory, this process prevents institutional investors from hoarding IPO stocks.

The bears will point out that SPACs are blank check companies that have no real value unless they find a takeover target within a two year period. This pressure could lead SPACs to make early acquisitions or to dress weak companies as strong ones. Several prolific short sellers, including Wolfpack Research, have made similar allegations against Skillz.

The shorts against Cathie Wood

Wolfpack’s attack on Skillz in early March, along with an opportunistic secondary stock offering for $ 24 per share later this month, ended its Reddit-fueled rally. But in April, famous growth investor Cathie Wood bought Skillz shares for two of her ARK Exchange Traded Funds (ETFs) and denounced Wolfpack’s allegations as “excessive or false” in an investor newsletter.

Today Skillz makes up 2.08% of the Next Generation ARK Internet ETF (NEW: ARKW) and 1.08% of the ARK innovation ETF (NYSEMKT: ARKK). However, Wood’s support couldn’t prevent Skillz from slipping below its initial opening price in the months that followed.

The Skillz business model

Skillz’s online platform hosts multiplayer games and tournaments for other companies. The cops believe this approach is disruptive as it allows smaller game developers to easily incorporate multiplayer and competitive features without building these services from scratch.

Skillz’s growth rates support this thesis. Revenue rose 92% to $ 230 million in 2020 and is expected to grow 63% this year. Analysts expect revenue to grow another 46% to $ 551 million in fiscal 2022.

However, Skillz’s net loss soared from $ 24 million in 2019 to $ 122 million in 2020, and analysts believe it will remain unprofitable for the foreseeable future. Skillz’s losses are warning signs as the company has already withheld 50% of all revenue from its hosted games. Most other mobile app stores only withhold a 15-30% cut in revenue from an app, so Skillz doesn’t have much leeway to raise its prices.

Skillz also relied on just three games from two studios (Big Run and Tether) for 79% of its revenue in 2020. Total Monthly Active Users (MAUs) grew just 4% year over year to 2 in the first quarter of 2021, 7 million. These numbers suggest that Skillz is not as disruptive as the cops would like to believe.

On the plus side, Skillz’s paid MAUs grew 81% to 467,000 for the quarter, average revenue per paid user increased 7% to $ 60, and average total revenue per user increased 86% to $ 10.35.

These growth rates suggest that the stickiness of Skillz’s platform could hold onto their top games and players even if overall MAU growth faltered. These strengths could also help Skillz maintain its pricing power.

Skillz also recently agreed to buy Aarki, an in-game advertising platform that hits over 465 million MAUs. This purchase could strengthen Skillz’s own digital advertising ecosystem, which monetizes the MAUs that do not participate in its paid tournaments, and attracts more mobile game developers.

Is Skillz a Bargain?

Skillz trades at 16 times this year’s sales, making it cheaper than many other high-growth technology stocks, but that lower price-to-sales ratio reflects the company’s uncertain future.

Personally, I wouldn’t buy Skillz because its slowed MAU growth, high fees, increasing losses, and customer concentration issues are hard to ignore. However, I expect Skillz to remain a headline-dominating stock as the bulls and bears argue about their strengths and weaknesses.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

source https://thedailytradingnews.com/why-is-everyone-talking-about-skillz-stock/