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Here's Why Skillz Could Continue Shedding Users

By Parkev Tatevosian, CFA – Oct 2, 2021 at 6:31AM

Key Points

  • The growth streak ended in Q2 with a sequential decrease from Q1.
  • The reopening of economies is a headwind for this company.
  • Advertising prices are increasing, reducing the effectiveness of marketing for Skillz.

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Skillz was on a streak for seven consecutive quarters, increasing the number of paying monthly active users.

Mobile gaming platform Skillz (SKLZ -4.60%) gained momentum at the pandemic onset when folks began spending more time at home. The change in consumer behavior led to a surge in demand for in-home entertainment, boosting companies that could provide those services. 

People are cautiously spending more time away from home as a global vaccination campaign against COVID-19 is progressing. The reversal in the stay-at-home trend is causing some pain for companies like Skillz. And that's not the only reason why Skillz could continue shedding users in the near term.

A young person smiling while using a smartphone.

Image source: Getty Images.

Skillz is losing momentum as economies reopen

In its fiscal second quarter ended June 30, Skillz reported a sequential loss in paying monthly active users from 0.467 million to 0.463 million. Small as it was, the loss is not as significant as the reversal of the trend. Skillz was on a streak of increasing paying monthly active users for seven consecutive quarters. That ended with the drop in the second quarter. Still, the paying monthly active user total was 53% higher than it was in the same quarter last year.

That was not the case with the overall monthly active user total. The figure dropped to 2.4 million as of Q2 2021 from 2.6 million in the same quarter last year. Decreasing momentum in the growth of users could be a result of economies reopening. Folks have more options for what they can do with their time and money, and they are increasingly choosing activities outside their home. People have been cooped up at home for the better part of a year, so having some pent-up demand to do things away from home is only reasonable. 

The price of advertising is increasing

A related effect of economies reopening is that businesses are ramping up advertising spending. Corporations cut back on marketing significantly at the pandemic onset for two reasons: If you were deemed an essential retailer, you barely had enough inventory to deal with surging customer demand -- no need to advertise in that scenario. On the flip side, if you were forced to shut your doors (think movie theaters), there is no reason to advertise to attract customers. 

That departure from the advertising market decreased prices and gave companies like Skillz an opportunity to market to consumers at attractive prices. As economies reopen, that trend is reversing. Businesses are reentering advertising markets to let their customers know they are open for business again. That's causing a substantial rise in prices for advertising

That could partly explain why Skillz spent 111% of revenue on sales and marketing in the most recent quarter and still ended with lower user totals. The company is not getting as much bang for its buck, and it indicated it could reduce user-acquisition spending even more if advertising prices don't stabilize or decrease.

Economies are reopening, and people are possibly spending less time on mobile devices as they become more active outside of the house. Moreover, rising advertising prices could cause Skillz to reduce marketing spending or experience decreasing effectiveness of that spending or both. For those reasons, Skillz will likely continue shedding monthly active users in the near term. 

Those interested in acquiring shares of Skillz should wait at least a quarter or two to observe how management adjusts if player losses indeed continue. If it throws more money at the problem in the same manner, then stay away. However, if it attempts new methods of attracting players that seem reasonable, then it could be worth putting Skillz on your watch list and seeing if it works. 

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.

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