On Feb. 5, investors in mobile-gaming platform Skillz (SKLZ -1.63%) were clanking champagne glasses, celebrating the stock reaching an all-time high of $46.30 per share. In a matter of months, the stock had surged more than 300%, catalyzed by prominent investors, like Cathie Wood, throwing their support behind the company.
Skillz stock crashed just as quickly as it soared. The drop has multiple explanations. First, short-sellers have published reports alleging management is only trying to enrich insiders, among other things. Additionally, retail investors are supposedly relinquishing growth stocks and buying value stocks instead. Finally, Skillz did a secondary stock offering that didn't sit well with the market.
As of this writing, Skillz is trading around $15 per share -- down 65% from February highs. And because of this, I think the stock finally offers a favorable mix of growth and value.
Image source: Getty Images.
Skillz's forward guidance
In a recent interview with The Motley Fool, venture capitalist Chamath Palihapitiya explained why a special purpose acquisition company (SPAC) has some advantages over an initial public offering (IPO). Palihapitiya said the benefit of merging with a SPAC is "that it allows you to talk about the future."
Skillz went public via a SPAC merger in 2020. At the time, it talked about the future for the rest of 2020, 2021, and 2022. It also included some past financial performance.
| Metric | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|
| Full-year revenue | $17 million | $51 million | $120 million | $225 million | $366 million | $555 million |
| Growth | N/A | 200% | 135% | 88% | 63% | 52% |
Data source: Skillz.
Skillz's revenue growth rate has steadily declined and is expected to keep falling. However, a 52% growth rate is still impressive if the company hits its 2022 guidance. Furthermore, the growth rate could fall further and Skillz would still reach $1 billion in annual revenue by 2025.
However, investors frankly can't be as confident with Skillz's guidance as much as they could with many other public companies. And management's track record is vital. But because it only just went public, Skillz hasn't had time to establish one yet.
That said, we can judge Skillz on its performance to date. And, so far, it's performed well. For 2020, the company generated $230 million in revenue, beating previous guidance by $5 million. That doesn't mean 2022 guidance is already in the bag. But management's young track record is certainly trending in the right direction.
Furthermore, founder and CEO Andrew Paradise recently shared some intriguing ideas for growing revenue. But these ideas aren't included in forward revenue guidance. In other words, management's guidance appears to be conservative. And conservative guidance gives it a little more weight.
Image source: Getty Images.
Valuation assumptions
There are multiple ways to value a stock and no metric should be used in isolation. But for an unprofitable company like Skillz, a price-to-sales ratio (P/S) comes in handy. Based on my calculations of current shares outstanding, Skillz has a market capitalization of almost $6.7 billion at $15 per share. Based on this, Skillz stock trades at trailing P/S of 29. That's not cheap by any means. But it's also not unheard of for a technology stock that grew revenue 92% year over year in 2020.
Assuming Skillz indeed generates $555 million in sales next year, the stock trades at 12 times 2022 revenue. That's far more palatable for a company that hopes to still be growing revenue at a 52% annual rate by then.
Image source: Getty Images.
Growth and value?
At its height, Skillz stock traded at around 90 times sales on a fully diluted basis. That's incredibly pricy and I'd argue the pullback, to an extent, was warranted for this reason. To me, it seems investors got caught up in the news cycle and bid the stock up far ahead of the business fundamentals.
I'm betting it will still be a volatile ride. But if you're willing to hold for five or more years -- something most other investors probably aren't thinking about -- then I believe right now is a good entry point for a starter position in Skillz stock. I think 12 times forward sales is reasonable, and management's blooming track record gives enough confidence for a small stake. If the company keeps hitting or exceeding guidance, that would be a good reason to buy more shares.
