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Skillz Stock Crashes After Earnings: Was It Justified?

By Parkev Tatevosian, CFA – Aug 12, 2021 at 7:45AM

Key Points

  • Rising customer acquisition costs were the main driver of the wider earnings loss.
  • The company made a key purchase that will reduce customer acquisition costs in the long run.
  • Skillz boasts a large spread in long-term customer value over customer acquisition costs.

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The company reported a wider-than-expected loss per share for the second quarter.

Skillz (SKLZ -2.80%) reported fiscal second-quarter earnings on Tuesday, Aug. 3. The online multiplayer video game competition platform operator announced a wider-than-expected loss per share, and the stock fell as a result. Investors are concerned with management's aggressive spending to acquire customers. 

But is that enough justification for sending the stock price down nearly 10% following the announcement, especially after the fall of over 30% the stock price has already taken in 2021? Let's take a closer look to find out. 

A group of kids on mobile devices.

Skillz's stock price is down almost 40% in 2021. Image source: Getty Images.

Second-quarter developments  

In the first quarter, Skillz, which allows users on its platform to compete in various mobile game competitions, reported a loss per share of $0.21. Analysts on Wall Street expected a $0.09 loss. That larger-than-expected loss spooked investors. But the bigger loss was due to an increase in user acquisition costs. These are mainly variable expenses that management can pull back if the value in return does not justify the costs.

Indeed, management reduced user acquisition spending by 15% from Q1 because of rising costs. Importantly, management highlighted an interesting fact at its investor day presentation in April, when it revealed long-term customer value (LTV) exceeds customer acquisition costs (CAC) by 3.8 times. That gives the company plenty of wiggle room to absorb higher CAC. 

And here's what Chief Revenue Officer and Treasurer Casey Chafkin had to say on long-term value in its second-quarter conference call:

What we've seen for the first half of the year is that our LTVs remain strong and steady. And we've previously shared some of those LTV curves, but we continue to see our LTVs remain quite strong. CPIs are up across the industry and this is something we've talked about over the last couple of quarterly earnings calls.

Moreover, Skillz recently purchased Aarki, a growing demand-side advertising platform that reaches 465 million consumers. The acquisition will help mitigate CAC increases longer term. Skillz will allocate a part of its advertising dollars to Aarki, which will lower costs by saving on fees charged by demand-side platforms. It will also give Skillz leverage against providers of advertising by having them compete for its marketing spending.

With long-term customer value intact and mitigation efforts to deal with rising CAC, aggressive spending on user acquisition may not be as negative as investors are making it out to be. 

Was Skillz's stock price drop justified?  

There was certainly good reason for the stock price to fall following second-quarter earnings. The company reported a loss per share that was larger than anticipated, and it indicated one of its major costs is increasing. However, that does not mean the stock price drop is not an opportunity for long-term investors. The cost of acquiring customers is volatile -- management expects it to fluctuate from quarter to quarter and has plans to deal with it. And the Aarki acquisition will work over the long run to help reduce CAC. Most importantly, Skillz's long-term customer value remains intact.

Investors looking for a fast-growing stock that can thrive as people spend more time gaming on their mobile devices can add Skillz stock to their lists. The stock price is down almost 40% year to date, and investor sentiment is negative. Indeed, the stock is trading at a forward price-to-sales ratio of 12.46, down from its high of over 40 earlier in the year. Yet Skillz's long-term value presents a buying opportunity.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skillz Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

Skillz Inc. Stock Quote
Skillz Inc.
$0.98 (-2.80%) $0.03

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