Mobile-gaming platform Skillz (SKLZ +1.54%) has seen its stock price soar only to come crashing back down and hit new all-time lows. The stock is now down an excruciating 80% from its all-time high in February. There's no sugar-coating it: This hasn't been a fun time for investors.
However, there may be a bright side to Skillz's plunge for anyone looking to invest new money today because the stock now trades at a far more reasonable valuation than it did before. In this video from Motley Fool Backstage Pass, recorded on Oct. 5, Fool contributor Jon Quast explains to fellow contributor Jason Hall why he believes Skillz is a good value stock now, provided the company executes on its business plan.
Jason Hall: Jon, I think it's going to be the same case with the one you want to talk about.
Jon Quast: Yeah. If I may, just real quick, I don't want to take for granted that [laughs] everybody knows what we're talking about. SPAC, special purpose acquisition company. These are Shell companies in a way, they also called a blank-check companies. The reason why is they go on the stock market so that they can raise millions of dollars and then they go out and they negotiate a merger agreement with some other private company. It's based on a share price of $10. That's the baseline of how the valuation of the company is determined.
What I like about SPACs in a lot of ways is that, it's a way for these private companies to negotiate their own value and it's a nice influx of cash without going through the whole IPO process. There is advantages in some ways for the companies.
When I see these things that are down below the $10 negotiated price, that to me is something that piques my interest because I recognize that there's probably a lot of cash from the SPAC merger on the balance sheet. Some that I'm really interested in learning more about that I don't know about yet in a lot of ways up OppFi, competitor to Upstart. MoneyLion, it's a fintech company. And Offerpad, an iBuying company in the real estate market. I don't know about these companies yet, but they're below that $10. I'm really interested in learning more. I'm also interested about the one that you're going to talk about, Jason.
But one that I do know about is Skillz. I say this with fear and trembling because I know [laughs] that a lot of people are down on Skillz stock, myself included. I'm probably the most bearish bull there is on Skillz.
Hall: Bearish bull, I love that description and it's an apt one, and maybe we should all be bearish bulls on all of our stocks.
Quast: [laughs] Well, with Skillz, I definitely see long-term upside. However, I do see a lot of challenges that the company is going to have to overcome to be a market-beating investment. You look at what it's done, we've spiked way up here shortly after it went public under the ticker symbol S-K-L-Z. Now, we've come all the way back down, but really, from that $10 negotiated price we're only down about 12%. Let's just keep some things in perspective here a little bit.
But the thing with Skillz, they still have to grow their top-line. They still have to attract new game developers to their platform. That's what they offer. They offer a software kit to video game developers so they need to attract more users and paying users who are actually putting money into the system.
Whether or not they're going to do that, there are some catalysts. They've partnered with a company in Europe called [Play Mechanix], perhaps, this is going to open up new game genres for them. I really see some upside there. Their latest game, Big Buck Hunter, is doing quite well in the App Store. Maybe this is the next million-dollar game for Skillz.
But what is interesting for investors today is that the valuation has gotten a lot more attractive. From that perspective, if they execute, this is actually turning into a much more reasonable or a much more lucrative opportunity for investors. I just want to point out right now on a fully diluted basis, Skillz market cap, the value of all their shares including their outstanding warrants, things like that, about $3.9 billion. The company expects to do $389 million in revenue this year, so 10 times this year's sales is the valuation.
For a company that expects to grow that top line 69% year over year, that is actually a fairly decent valuation. Next year, they expect to have $555 million in revenue. That's trading at seven times next year's revenue, while still growing the top line at over 40% with 95% gross margins, mind you. The valuation has gotten a lot more attractive. What matters now is the company has to go out and execute.
Hall: Yeah, that's the key, and this is one too that they execution is to start showing up in its cash flows. That's something that you really need to pay attention to with this company because of some key things about its revenue recognition.
