It was less than four months ago that mobile video game platform Skillz (SKLZ -5.13%) was flying high, with a market capitalization of $16 billion and a brand-new partner in the National Football League. Investors thought the deal with the NFL would vault the company to profitability and open up a huge runway for growth.

But the optimism reversed course quickly. A short-seller report came out soon thereafter that questioned the growth story, accusing Skillz of exaggerating revenue projections, and saying past announcements of partnerships amounted to nothing. With the stock down more than 50% since then and the company reporting record revenue again in its first-quarter 2021 results, it's worth looking at whether the share-price slump may have come to an end.

Person holding their head in their hands in front of computer displaying a stock chart.

Image source: Getty Images.

What went wrong?

The announcement of the NFL partnership in February helped confirm to some investors that the high-growth company was worth its premium valuation. With no earnings, and a price-to-sales (P/S) ratio of about 70 based on 2020 revenue, there was a sense of euphoria about Skillz.

But teaming with the NFL for a multiyear gaming agreement brought an added air of legitimacy. Skillz touted the deal, saying in a statement, "Working with Skillz enables the NFL to reach the next generation of football fans where they live -- on mobile -- while driving the convergence of traditional and online sports." The company envisioned "hundreds of millions of NFL fans" potentially moving to its gaming development platform. 

But though Skillz reported almost doubling its revenue in both Q4 and full-year 2020, a short-seller report in early March accelerated a decline in the stock. Wolfpack Research said it believed growth had slowed to a halt, and called the future revenue predictions "farcical."

After an initial pop following its fourth-quarter and full-year 2020 financial report, shares began to plummet, dropping more than 35% since mid-March. 

Adjusted expectations

By the time Skillz reported first-quarter 2021 results in May, its valuation was meaningfully lower. But even after management raised 2021 sales guidance to $375 million -- implying 63% growth over 2020 revenue -- the P/S ratio was still pushing 20. It currently stands at 21.5 based on those 2021 sales estimates, after a recent jump in shares came when the company announced the acquisition of advertising-technology company Aarki. It plans to integrate an Esports advertising platform with the acquisition. 

While many investors that had bought in earlier may have been feeling dejected, ARK Invest's famed exchange-traded fund (ETF) manager Cathie Wood started piling in. Wood has bought enough Skillz stock to make it the 23rd-largest position in her ARK Innovation ETF, and it's in the top 15 for her ARK Next Generation Internet ETF. Those two holdings are currently worth about $480 million. 

Four people sitting on a couch and playing video games on smartphones.

Image source: Getty Images.

Marking a bottom?

Wood isn't necessarily calling a bottom with her accumulation of shares. She has, in fact, bought at various levels both above and below recent prices. But she may continue to buy higher, as many high-growth investors plan to buy more as stock prices continue to gain. And certainly a valuation at a P/S ratio over 21 isn't going to be the bottom. But investors hope that the denominator is what continues to bring that down, as revenue grows over an extended number of years. 

For that to happen, Skillz will have to continue to report a growing number of paying active users. In its Q1 report, the company said paying monthly active users soared 81% year over year. But profitability won't come until Skillz spends less to continue to drive that growth. Sales and marketing expenses jumped 99% compared to the prior-year period. 

Those are two important metrics investors should keep monitoring to determine if the worst is in fact over for Skillz' share price.