Skillz (NYSE:SKLZ), a gaming company that provides a competitive multiplayer platform for mobile games, recently became a battleground stock as short sellers clashed with growth investor Cathie Wood.

The bears, led by prominent short-seller Wolfpack Research, claimed the growth of Skillz's top three games had peaked, its growth forecasts were "unrealistic," and it had exaggerated the impact of a recent NFL deal to enable its insiders to sell millions of shares at "inflated prices."

Wood subsequently increased her stake in Skillz via two of her ARK exchange-traded funds and claimed Wolfpack's allegations were "either exaggerated or incorrect" in a recent newsletter. Skillz now accounts for 2.05% of the ARK Next Generation Internet ETF (NYSEMKT:ARKW), as well as 0.45% of the ARK Innovation ETF (NYSEMKT:ARKK).

A group of friends plays smartphone games together.

Image source: Getty Images.

That clash, along with Skillz's secondary offering of 32 million shares in March, caused its stock to swing wildly over the past month. So should investors side with the bears or Cathie Wood?

A short history of Skillz

Skillz was founded in 2012 and went public last December by merging with a special purpose acquisition company (SPAC). It enables developers to integrate its multiplayer features and prizes into any iOS or Android game with a lightweight software development kit (SDK). It also processes in-app payments and helps developers monitor the performance of their games on a unified dashboard.

Skillz's platform served 2.4 million monthly active users (MAUs) at the end of 2020, and it hosted an average of more than 5 million daily tournaments. More than 9,000 registered game developers use its services, but it's mainly dependent on two developers: Tether and Big Run.

Three games -- Tether's Solitaire Cube and 21 Blitz, and Big Run's Blackout Bingo -- collectively generated 79% of Skillz's revenue in 2020. After including their smaller games, Tether and Big Run accounted for 87% of Skillz's top line last year. That customer concentration represents a major risk.

How fast is Skillz growing?

Skillz's revenue rose 92% to $230 million in 2020. Its gross merchandise volume (GMV), or the value of all transactions across its platform, increased 80% to $1.6 billion.

Skillz's gross margin held steady at 95% as its gross profit jumped 91% to $218 million. However, its net loss widened from $24 million to $122 million as its total costs and expenses surged 128% to $330 million. Its adjusted EBITDA loss also widened from $23 million to $66 million.

A couple plays smartphone games on the couch.

Image source: Getty Images.

Skillz expects its revenue to rise 59% to $366 million in 2021, but it didn't provide any bottom-line guidance. Based on that forecast, Skillz's stock trades at about 23 times this year's sales. That frothy price-to-sales ratio makes it comparable to many of the market's highest-growth tech stocks.

Skillz also faces competition on several fronts. Larger game publishers will more likely develop their own multiplayer, in-app transaction, and analytics features than they would be to rely on a third-party company like Skillz. Companies like AppLovin (NASDAQ:APP) also help developers manage and monetize their own apps.

Skillz has generated strong growth from its relationships with Tether and Big Run so far, but it's unclear if it can successfully diversify its business away from those top customers.

Skillz recently announced a partnership with the NFL to host a developer competition for NFL-themed mobile games, which would presumably bring more developers and players to its platform. However, it's unclear if any of those new games will reduce Skillz's dependence on its three core games.

Why is Cathie Wood bullish on Skillz?

Wood doesn't seem concerned about Skillz's customer concentration, the competition, or the dilution from its recent secondary offering.

Instead, Wood likely believes Skillz will keep growing by making it easier for smaller developers to offer multiplayer features in their games. There could always be demand for Skillz's services since it's difficult for smaller developers to create those features from scratch.

Two other top ARK stocks, Twilio (NYSE:TWLO) and Shopify (NYSE:SHOP), followed the same trajectory. Twilio let developers easily integrate in-app text messages and calls with a few lines of code, while Shopify enabled smaller businesses to launch their own online stores and free themselves from Amazon.

The weaknesses outweigh the strengths

Skillz operates an interesting business, but its customer concentration, narrow niche, widening losses, and high valuation all make it an unappealing investment. I'm not sure if Wolfpack's claims are accurate, but it's also odd for Wood to defend Skillz's wobbly business model.

Therefore, I'm staying bearish on Skillz until it can diversify its business away from its two main customers. But if it can continue to secure new customers as it narrows its losses, I might change my tune.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.