What happened
As of the market close on Thursday, shares of Skillz (SKLZ 2.59%) had fallen by 11% this week. But if you search for news, filings with the Securities and Exchange Commission (SEC), or even analyst commentaries, you won't find anything that explains why.
Rather, it seems Skillz stock fell simply because it's a volatile investment.
So what
Skillz, which operates a platform that brings mobile gamers and developers together, is a high-growth company. In 2020, its revenue surged 92% to $230 million. And revenue for the first quarter of 2021 was also up 92% year over year to $84 million. Those impressive top-line gains and its stellar 95% gross-profit margin have attracted a fair number of bulls to the stock. As a result, it's trading at a lofty valuation of 25 times trailing sales. For perspective, mature companies often trade between 1 and 2 times trailing sales.
Image source: Getty Images.
Stocks that trade at such high valuations tend to be volatile investments, taking wide swings up and down over relatively short time periods. So it's not uncommon to see Skillz shares move 11% in a week even when there's no obvious news driving the stock. Conditions will likely stay this way for the foreseeable future as well. Of course, that goes both ways. The stock soared almost 28% in June on very little change in the business, other than its acquisition of Aarki early in the month.
Now what
The movements of Skillz stock exemplify a broad Wall Street truth -- many (if not most) traders are playing a short game, jumping in and out of investments based on emotions related to fear and greed. But investors can gain an advantage in this game by operating with a longer time horizon. When you're looking three to five years out, what a stock does today or this week likely will have little bearing on your investment thesis.
Skillz will likely report its second-quarter results in about four weeks. When it does, look at its user growth generally -- and specifically, look at paying user growth. If the company is attracting more users and a larger percentage of them are depositing money, that would support a long-term bullish thesis. Lack of growth in this area would support a bearish thesis.
If you're focused mostly on the daily price moves of a stock, it's easy to get too caught up in short-term thinking. But by choosing to focus on concrete, long-term business fundamentals, it's easier to make better investing decisions because you mitigate the role your emotions play. After this week, I'd encourage both the Skillz bulls and the bears to keep that in mind.
