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Is Skillz Stock a Buy?

By Jon Quast - Mar 13, 2021 at 11:07AM

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Investors will have to weigh these risks against the potential rewards.

Mobile-gaming platform Skillz (SKLZ -5.67%) believes it's already eight years into a 100-year journey. But it's journey as a public company is just beginning. It went public in December via a special purpose acquisition company (SPAC) and released its first earnings report yesterday. 

Now with complete full-year 2020 results, it's time to ask if Skillz stock is a buy. As with any stock, there are risks investors should know about. That said, this business has some impressive metrics, giving it promising long-term upside.

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Metrics to love

According to Skillz management, mobile gaming is a $68 billion market and is growing 20% annually. And there are an estimated 2.7 billion gamers in the world compared to just 2.4 million monthly active users for Skillz. This is an enormous runway for the company, and if it's 92% year-over-year revenue growth in 2020 is any indication, it seems poised to claim its piece of the pie. 

Management says its users spend more than an hour daily on the platform, which is more than users of popular platforms like TikTok, Snap's Snapchat app, or Facebook. And this doesn't appear to be a short-term anomaly. Since the platform's inception, every cohort of Skillz users has continued to grow in value for the company.

It has a large total addressable market (TAM), an impressive history of growth, and a highly engaged and valuable audience. But there's one more metric to love.

Because Skillz doesn't make any games (it lets third parties do that), it had an eye-popping 95% gross profit margin in 2020. Its net loss for the year grew to $122 million as it spends aggressively on growth, but with gross margins like that, Skillz could become a cash cow with the push of a button.

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Don't overlook these three risks

After going public, Skillz stock took a big hit when short-seller Wolfpack Research called it a "SPACtacular disaster." While the report is too long to fully address here, I'll highlight one valid concern. Wolfpack points out Skillz's dependence on just three games, which accounted for 79% of revenue in the first three quarters of 2020, according to Skillz.

Wolfpack believes Skillz's most popular games are foundering. But even if they aren't, it highlights how crucial development of new hit games is and how hard growth will be without it.

Furthermore, with a $10.5 billion market capitalization, investors should be wary of the valuation. It only generated $230 million in 2020 revenue, meaning it trades at over 46 times trailing revenue. With a nosebleed valuation like this, investors clearly expect stellar growth for years. But the company's dependence on just a few titles will make that hard.

Finally, user numbers are declining. In the third quarter, Skillz had 2.7 million users; in the fourth quarter, it was down to 2.4 million. Paying users (some games are free) more than doubled year over year, which drove revenue growth anyway. But this overall decline in its user base is another good reason to think twice before buying Skillz stock.

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Does management make the difference here?

With new initial public offering (IPO) stocks, or SPAC mergers like Skillz, it's often advantageous to wait for management to demonstrate reliability. Skillz leadership delivered with its first quarterly report by guiding for full-year revenue of $225 million, but delivering results of $230 million, a nice first step toward building credibility with investors.

It's possible management is underpromising. CEO Andrew Paradise said certain growth drivers aren't included in its guidance -- specifically its recently announced deal with the National Football League. While NFL game development doesn't launch until next quarter, just having this partnership could drive user growth as the NFL's fan base is exposed to Skillz's platform. So there's a reasonable chance results can exceed current guidance of 59% year-over-year revenue growth.

The company's CEO scores high marks with an 85% approval rating from employees on the site Glassdoor. And Paradise's interests are aligned with those of shareholders: He still owns roughly 18% of the company, an indicator of his bullishness.


Skillz spent almost $252 million on sales and marketing in 2020, which exceeded revenue. And yet, its overall user base declined. These statistics alone make me leery of buying Skillz stock at today's valuation.

That said, I believe its business has a high ceiling and its management shows great promise. So it may be worth a starter position today. If the company demonstrates sustained user growth or if the stock falls to a more reasonable valuation, then it would be worth considering a larger stake.

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