For investors in Skillz (SKLZ) stock, there has been no reason to cheer. After a relatively euphoric listing and highs of $46.3 in February 2021, SKLZ stock has continued to disappoint. Over a 12-month period, the stock has declined by 83%.
It would take some courage to still be bullish on the stock and consider fresh exposure. However, I believe that the worst of the downside might be over. SKLZ stock looks attractive at current levels and might be poised for a reversal.
It’s first important to understand the reason behind the massive correction.
First and foremost, Skillz has shown stagnation in terms of growth in monthly active users. This is a key cash flow and valuation driver. The stock has therefore been punished.
Furthermore, Skillz has witnessed an acceleration in cash burn. For high-growth companies, cash burn is not an issue. However, it becomes a concern when the burn is not associated with healthy growth in key metrics.
Of course, these concerns sustain. At the same time, Skillz has continued to build its business fundamentals. There are possible catalysts on the horizon.
Balance Sheet to Support the Growth Story
An important point to note is that Skillz has still maintained a relatively healthy revenue growth trajectory. For Q3 2021, the company reported 70% growth in revenue on a year-on-year basis to $102.1 million.
This didn’t impress the markets as monthly active user growth was subdued. However, Skillz has ample financial flexibility to invest in accelerating growth.
As of Q3 2021, the company reported cash and equivalents of $540.3 million. Additionally, the company raised $300 million in December 2021 from a senior note offering.
With a total liquidity buffer of $840.3 million (unadjusted for Q4 2021 cash burn), the company is positioned to invest for growth.
The balance sheet also highlights the point that there are no concerns from a financial perspective. Once core business growth gains traction, the stock reversal can be swift.
Reasons to Be Hopeful
As mentioned earlier, a key negative factor has been sluggish monthly active user growth. In early January 2022, Skillz announced that the company had launched in India. This is Skillz’s first foray into a big international market.
According to Boston Consulting Group and Sequoia India, the mobile gaming industry in India will be worth $5 billion by 2025. If Skillz can make inroads in this market, there is significant potential for accelerating user growth.
Skillz also believes that the global mobile gaming market is worth $86 billion. It seems likely that the company will pursue expansion into other high-growth markets. The results will be seen in the next 12-24 months in the form of user growth acceleration.
From a platform development perspective, Skillz launched the mobile version of the iconic game, Big Buck Hunter.
In Q3 2021, the company also closed an investment in Exit Games. This will help Skillz in accelerating the launch of multiplayer synchronous racing, shooting, and fighting games. Considering its financial flexibility, Skillz is positioned for further organic and investment-driven platform improvements.
In terms of potential opportunities, the metaverse is getting bigger. It’s estimated that metaverse might be an $800 billion opportunity in the coming years. The technology platform has already attracted online game makers. It will not be surprising if Skillz takes a plunge in the metaverse space. It’s a speculative view but seems very likely.
Wall Street’s Take
Turning to Wall Street, Skillz has a Moderate Buy consensus rating, based on three Buys and three Hold ratings assigned in the past three months. The average Skillz price target of $18.6 implies 290.8% upside potential.
Bottom Line
In Q3 2021, Skillz also appointed Vatsal Bhardwaj as Chief Product Officer. Bhardwaj has been a director of Game Tech for Amazon Web Services. He has also worked as a Head of Products for several groups at Meta Platforms (FB). Skillz has therefore been investing in resources and platform building.
Of course, concerns sustain, and the markets will closely observe if higher marketing and sales expense translate into user growth. With product development and entry into new markets, that seems likely.
It, therefore, makes sense to consider some exposure to the deeply oversold stock. One quarter of a meaningful turnaround can be a catalyst for a sharp reversal rally.
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