Skillz (SKLZ -2.06%) has created a somewhat unique niche in the online gaming sector because its mobile game competitions allow for wagering between players along with the normal, free-to-play games for those not inclined to bet on the outcomes. Next, week, the company will offer an update on how its business is doing.

On Wednesday, Skillz is scheduled to report third-quarter earnings and interested investors will be watching closely to see if the report indicates it was able to attract new players and increase engagement among existing players. There is some concern in this regard because Skillz shed players in its most recent quarter as economies reopened and people spent less time at home playing games. Shareholders are hoping the release of a highly anticipated game this past quarter attracted players back to the platform.

A smiling person wearing a headset playing games on a desktop computer.

Image source: Getty Images.

A new game could boost user growth for Skillz

Unfortunately for Skillz, its streak of seven consecutive quarters of sequential growth in paying monthly active users ended in Q2. The decrease was slight, from 467,000 to 463,000, but the end of the streak was notable. To make matters worse, the company spent $99.5 million on sales and marketing on revenue of $89.5 million. Spending over 100% of revenue on marketing and still losing users alarmed investors.

The ineffectiveness of marketing spending is one reason Skillz stock price has fallen from a high of $46.30 per share earlier in the year to $11.64 as of this writing. A change of approach to this business may be due depending on what the company reports for Q3.

Skillz management said it split the marketing spend between user acquisition ($47 million) and user engagement ($44.9 million). User acquisition spending is intended to attract customers to sign up for Skillz and download the app. Engagement spending is geared toward getting existing players to deposit funds and play for real money. For instance, offering a player a $10 match on a $10 deposit. That way, for a $10 deposit, the player will have $20 in their account.

For that reason, it will be interesting to hear how the release of the highly anticipated game Big Buck Hunter affected user growth and engagement. It should be noted that Skillz does not develop the games on its platform. It leaves that to outside developers, who then get a percentage of the revenue generated by players transacting on their games. If Big Buck Hunter had a strong influence in getting players to the site, then maybe management could pivot some marketing spending toward encouraging the development of new games. 

Big Buck Hunter launched on the app on Sept. 23 and quickly reached a Top-3 rank in the popular sports category on the app store, according to management. A quick check as of this writing has the game ranked No. 10 in the sports category on the app store. That's undoubtedly a good start, but investors will want to hear more when the company reports Q3 earnings in the first week of November.

Skillz has good long-run prospects 

Analysts on Wall Street expect Skillz to report revenue of $102 million and a loss per share of $0.14 in Q3. But the movement of Skillz stock price is more likely to be in response to monthly active user metrics rather than the quarters' revenue and earnings figures. Investors are more concerned about its ability to attract players efficiently. The company also cannot sustainably spend over 100% of revenue on sales and marketing. 

Still, Skillz operates in a growing industry -- mobile gaming has grown at a compounded annual rate of 23% from 2015 to 2020. Further, the company offers wagering on contests, making it more interesting than games involving play money with no tangible rewards for winning. If management proves better at allocating capital this quarter, it might be a good time to consider adding shares.