What happened
Shares of Skillz (SKLZ 5.25%) rose 27.8% in June 2021, according to data from S&P Global Market Intelligence. The company behind a mobile game platform that lets players win cash prizes was primed for a big jump due to soaring short-seller interest in the stock. Skillz pulled the trigger with the acquisition of a digital advertising specialist.
So what
Roughly 25% of Skillz' shares were sold short in mid-May, which opened the possibility of a game-changing short squeeze. Any good news reported during a time of intense short-seller interest might force the bears to close their negative investment positions, thus driving stock prices much higher in a hurry. So when Skillz announced the $150 million buyout of demand-side advertising expert Aarki, the fuse was lit and Skillz shares soared. The stock closed 26.8% higher that day, having surged as much as 35% higher earlier in the trading session.
Image source: Getty Images.
Now what
The real thinking behind Skillz' sudden jump is that Aarki will help the company monetize its popular games from a different angle, adding a serious helping of ad revenue to the existing focus on cash-based gaming operations. The way the stock held relatively firm through the end of June is a testament to the solid business value of this deal. Short-squeeze gains often fade as quickly as they arrive, leaving many investors disappointed over the short-lived surge.
Skillz is far from a risk-free investment, trading at 30 times trailing sales with firmly negative earnings and cash flows. But the company is poised to disrupt the mobile gaming market, perhaps becoming a buyout target itself somewhere down the line. If you can stomach a few sudden haircuts along the way, this stock could deliver multi-bagger returns in the long run.
