Earnings season is one of four times throughout the year where investors get a glimpse behind the curtain to see how a company is performing. When Skillz (NYSE:SKLZ)Cloudflare (NYSE:NET), and Activision Blizzard (NASDAQ:ATVI) report the first week of November, investors will be watching closely. Each has a unique situations to analyze. 

Skillz

Skillz closed at $14.21 the day before it reported its second quarter earnings on Aug. 3. At the time of this writing it trades just above $10. While that decrease doesn't seem like much in terms of dollars, a near 40% decline does. What's happened to this stock that traded around $40 in February?

Its business model turns the traditional mobile gaming approach on its head. Instead of pestering its users with ads, it generates revenue by facilitating an environment where users compete for monetary prizes. Skillz takes a small cut in the process to fund its business. Skillz also provides tools to ensure proper matchmaking and fraud reduction. Most importantly, Skillz does not develop games; it provides the platform to create and run them.

Woman playing video games on phone.

SOURCE: GETTY IMAGES

During Q2 earnings, Skillz revenue increased yet their expenses increased even more.

Metric Growth YoY
Revenue Research and Development Sales and Marketing General and Administrative Total Expenses (Minus Cost of Revenue)
52% 124% 90% 118% 98%

SOURCE: SKILLZ 

This led to a greater than expected loss, which worried investors. Spending money on the business is OK, but when expenses are double revenue growth it raises red flags. Skillz also has a significant revenue concentration risk, with only three games accounting for 87% of 2020 revenue. Games go in and out of style quickly, so Skillz may fall victim to an uncontrollable factor.

Three titles aren't good enough for Skillz. It partnered with the National Football League to launch a mobile game before the 2022 season kicks off. Additionally, Skillz is counting on Big Buck Hunter: Marksman for future success. Skillz has great potential, but investors will need to see revenue diversification and its expense growth decrease. As a company with 6 times forward sales and a 95% gross margin, it's interesting enough to purchase, but only if the investor can stomach the risk. 

Cloudflare

Opposite of Skillz, Cloudflare is up an astounding 50% since it reported on Aug. 5. 

Cloudflare's mission is to "build a better internet." It accomplishes this by removing dated on-premise hardware running website servers. Instead, Cloudflare's data centers store bits and pieces of the website code all around the globe. Speeding up the website so visitors don't have long load times.  Cloudflare also provides security benefits for its customers. 

Once users switch to Cloudflare's platform, it's difficult to leave. This is reflected in its second-quarter dollar-based net retention rate of 124%. Management also commented that Cloudflare "had our strongest quarter ever as a public company." Revenue growth was 53% beating internal predictions by 4%.  Cloudflare did not produce positive free cash flow or net earnings, but it had more than $1 billion in cash on its balance sheet. 

To avoid a third-quarter post-earnings drop, Cloudflare will need to crush revenue expectations. Meeting management's 45% growth projection will not justify its current price to sales ratio of more than 100. It can also maintain its valuation by accelerating its large customer -- those that pay more than $100 thousand annually -- growth count. 

Cloudflare is also releasing new products, recently launching a serverless streaming product.  Allowing customers to stream video with low latency increasing the consumer experience. Continued innovation and revenue growth will provide investors insight into Cloudflare's future.  

Activision Blizzard

Activision Blizzard has recently made headlines, and not for a good reason. The California Department of Fair Employment and Housing filed a lawsuit against the company for the unlawful treatment of its female employees on July 20. Allegations included sexual harassment, unequal pay, and retaliation against those who tried reporting it.  On Sept. 27, it settled the suit for $18 million which will compensate the affected employees.

With Activision Blizzard pledging to improve its policies and acting on it by hiring additional staff dedicated to investigating future allegations, the company appears to be fixing the problem. Yet, the damage has already been done to its reputation and stock price. In a race to remove Activision Blizzard from portfolios, the sell-off generated a 16% drop since the lawsuit was filed.

The creator of games like Call of Duty, Overwatch, and Candy Crush reported a strong second quarter with a company record 42% operating margin. It also projected slightly higher than flat revenue growth for the third quarter. A revenue surprise could be the necessary catalyst to send this beaten-down stock higher.  

At a cheap 20 times price to earnings ratio, Activision Blizzard is worth a look. However, if an investor wants to steer clear because of the stigma created by the recent news, no one would think differently of their judgment. 

All three companies have different expectations heading into earnings season. Cloudflare -- reporting Nov. 4 -- is still the most promising, as it has shown continual execution and innovation. The other two -- both reporting Nov. 2 -- are more value plays but could become a value trap. Regardless, investors must handle large price swings with these stocks. Those who can withstand the volatility might benefit from an earnings surprise in the coming weeks. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.