Skillz Inc. (SKLZ) stock has been on a sustained downtrend since February 2021. This developer of mobile-game competition platforms has not been having a good year. After touching highs of $46.30, the stock currently trades at $16.33.
It seems that the correction might be overdone. Despite some fundamental concerns, SKLZ stock looks attractive at current levels.
The sluggish growth in monthly active users is the single biggest concern for Skillz. As of Q1 2021, the company reported 2.7 million monthly active users. For the comparable period in FY2020, the number of monthly active users was 2.6 million.
If user growth remains depressed, it will impact revenue and cash flow potential from a long-term perspective.
Additionally, Skillz reported an adjusted EBITDA loss of $31.1 million for Q1 2021 compared to an EBITDA loss of $14.6 million for Q1 2020. It seems like cash burn is likely to sustain in the coming quarters. (See Skillz stock analysis on TipRanks)
A Look on the Bright Side
On the other hand, there are positive factors that could make SKLZ stock worth considering.
First and foremost, the company reported revenue growth of 92% for Q1 2021 on a year-on-year basis to $83.7 million. Therefore, the revenue growth trajectory is still robust.
Furthermore, the company reported 0.467 million paying users as of Q1 2021 compared to 0.258 million paying users in Q1 2020. On a year-on-year basis, paying users growth was 81%. At the same time, the average revenue per user increased from $5.57 to $10.35. The company has been highly successful in gaining paying users, compensating for its slow growth in active users.
These metrics provide hope in terms of sustained revenue growth and potential improvement in EBITDA margins. In the first quarter, the company also expanded its Android footprint. Revenue growth from Android users has been twice as fast as revenue growth from iOS users. If this trend sustains, the coming quarters are likely to be strong in terms of top-line growth.
Encouraging Catalysts
Another factor worth noting is that the company’s sales and marketing expense was $96.3 million for Q1 2021. On a year-on-year basis, sales and marketing expenses increased by 106%.
Marketing efforts towards user acquisition will likely remain strong in the coming quarters. There should be a potentially positive impact on monthly active user growth. Furthermore, if the conversion ratio remains strong, EBITDA level losses are likely to narrow.
From a financial perspective, Skillz reported cash and equivalents of $613 million as of Q1 2021. For the same period, the company had zero debt. Therefore, there is ample financial flexibility for aggressive growth and expansion.
It’s worth noting that the company currently derives 90% of its revenue from North America. By the end of the year, the company has plans to launch in India, which has a large addressable market. Furthermore, Skillz is looking at expanding into other international markets in 2022.
Given its financial flexibility, the company can invest in localized games, sales, and marketing efforts. International expansion is a key trigger for user growth over the next few years.
Wall Street’s Take
According to TipRanks’ analyst consensus rating, SKLZ stock comes in as a Moderate Buy with 3 Buys and 3 Holds assigned in the last three months.
As for price targets, the average analyst price target is $26.92 per share, implying around 64.85% upside potential from current levels.
Concluding Views
Skillz stock currently has a market capitalization of $6.1 billion. For the current year, the company has guided for revenue of $375 million. The stock is therefore trading at 16.3 times FY2021 revenue.
Furthermore, the company’s revenue growth for FY2021 is guided at 63% on a year-on-year basis. With international expansion as the trigger, it could be assumed that similar growth is likely in FY2022. Therefore, assuming ball-park revenue estimates for the next year at $611 million, the stock is trading at 10 times FY2022 revenue.
Given all these factors, valuations do not seem to be stretched. SKLZ stock might therefore be worth considering after the correction.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
