Stock Analysis & Ideas

Skillz: A Speculative Cloud-Gaming Play

Skillz (SKLZ) stock burned a lot of optimistic investors last year. SKLZ stock has cratered over 80% in the past year and now trades in the penny stock territory. The recent tech stock correction and lackluster fourth-quarter results have triggered a massive sell-off in SKLZ.

However, we could be looking at a turnaround for Skillz with a renewed focus on profitability, the NFL deal, and other growth catalysts.

Skillz began trading at $17.89 after completing its reverse merger with the Flying Eagle Acquisition SPAC. Last February, its stock reached all-time highs of $46.30 but has fallen off the cliff.

Mobile games were a popular way to kill time during the pandemic, and Skillz was a major beneficiary of that trend. However, the pandemic faces incredibly tough comps, and its investors are jumping ship with the pandemic.

With the global gaming market expected to grow from roughly $203 billion in 2020 to $546 billion in 2028, investors ignore the bigger picture with SKLZ stock. Moreover, with it trading for just chump change, it doesn’t hurt to wager on it. I am bullish on the stock.

Cloud Gaming Opportunity

Perhaps one of the most interesting developments with Skillz recently is the announcement of its cloud-based gaming platform. Its foray into cloud gaming will help it reach a truckload of new Android users, thereby increasing the penetration rate of its games to newer players.

Perhaps more importantly, it could effectively avoid Google’s Play Store, a thorn in its side from the get-go. Alphabet doesn’t allow “real-money gaming apps” on its platforms, significantly limiting Skillz’s reach. Hence, the new platform could potentially reach out to over 70% of smartphone users globally.

Furthermore, it has partnered with the NFL to release NFL-themed games. Both organizations will be marketing the games and could add immensely to Skillz’s monthly active users (MAU). Additionally, a long-term partnership could be a source of recurring revenues and convert the fans of the football league into permanent users.

The Risks

Skillz is one of the riskier stocks out there in the market, so it has performed the way it has of late. Its customer-acquisition strategy has been a major concern from the outset, which raises long-term apprehensions about the company’s ability to be profitable.

Perhaps a more effective strategy would’ve been to target gaming partners in gaining new players. Skillz could’ve leveraged the user base of its gaming partners to gain traction quickly.

Moreover, there are plenty of uncertainties with the NFL deal too. A lot is riding on the deal, but there seems to be little clarity on the economics of the deal and the key elements of the arrangement.

Considering how big of a game-changer the arrangement can be for the company, the lack of details is surprising. Nevertheless, past football games can serve as models, and the betting component will add massive value for users.

However, the arrangement looks promising on paper, and it’s hard to see how Skillz would’ve gotten the upper hand in the deal. I won’t be surprised if the NFL deal comes out to be one-sided. If that is the case, the revenue and profitability expectations may have to be curtailed significantly.

SKLZ Outlook

Skillz has been on a phenomenal run over the past few years, generating double-digit growth in its top-line results. However, as the pandemic draws close, growth rates have normalized, turning investors away. Still, it ended last year with $384 million in sales, representing a whopping 67% growth from the prior-year period.

Skillz will be looking to improve its social features, player environments, and other elements to take its service to the next level. In doing so, it has acquired an e-sports advertising platform in Aarki to execute these plans effectively. Moreover, you also have the NFL partnership, which can help diversify its revenue base.

Furthermore, Skillz management plans to slash its marketing costs, which have weighed down its profitability. Sales and marketing represent close to 83% of its total costs, and most of these costs are relatively easy to cut off.

Wall Street’s Take

Turning to Wall Street, SKLZ stock maintains a Moderate Buy consensus rating. Out of seven total analyst ratings, four Buys, three Holds, and zero Sell ratings were assigned over the past three months.

The average Skillz price target is $4.92, implying 54.5% upside potential. Analyst price targets range from a low of $2.50 per share to a high of $7.50 per share.

The Bottom Line On SKLZ Stock

Skillz was among the companies which benefitted immensely from the pandemic-led tailwinds. The business faces some serious challenges with the world getting back to normal. However, it has plenty of growth drivers in place, which can drive its revenues higher for the foreseeable future.

Its recently released downward revenue guidance doesn’t include the impact of the NFL partnership. The NFL franchise is huge, and it will naturally bring in a truckload of new users to the company’s platform.

Moreover, its management has gotten more serious about costs and will be looking to increase profitability in the upcoming quarters. The risks are evident with the stock, but it doesn’t hurt to load up on it at current rates.

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