Shares of mobile-gaming platform Skillz (SKLZ 6.59%) fell sharply on Wednesday after the company announced a secondary offering of its stock. While this is common for high-growth companies like Skillz, you could make the argument that the timing of this event isn't great, contributing to the market's negative reaction. As of 12:30 p.m. EDT today, the stock was down 13%.
There are two groups of sellers with this offering: Skillz and stakeholders that aren't Skillz. For the stakeholders, they're selling 15 million shares for sure, but there could be almost 20 million shares if the underwriters exercise their options. These shares already exist, so this is nondilutive. On one hand, that's good. On the other hand, Skillz doesn't get any cash for this.
However, the company is also offering 17 million shares of its own, which does dilute existing shareholder value by about 4%. While no one wants to see this, the upside is that the company will get around $500 million if the share price stays around $30. Of course, the stock fell with the news, so perhaps it won't be getting that much in the end.
The market is generally down today, so Skillz stock may have fallen some even without this news. But the announcement is likely sending the stock down for two reasons: First, shareholders don't like dilution, especially so soon after its initial public offering (IPO). And second, nobody likes to see these sellers; the move communicates bearish sentiment, whether that's the intention or not.
There will potentially be a lot more shares of Skillz flooding the market in coming months, and it's possible investors are overlooking this. For example, Yahoo! Finance calculates its valuation metrics based on almost 292 million shares. But according to the company's investor presentation, there were 427.7 million shares on a fully diluted basis when accounting for things like outstanding warrants. And that was before today's announcement.
For example, there are over 22 million outstanding warrants that could be exercised soon, considering Skillz stock trades above the $18 trigger price. None of this means Skillz is a bad investment. To the contrary, you could argue these transactions enhance Skillz's long-term prospect: The company is increasingly flush with cash.
In other words, Skillz stock is down because of a stock offering. And more shares could come on the market soon. But investors need to consider a whole lot more to determine whether Skillz stock is a buy or not.