It's been a rough year for shareholders of mobile gaming competition platform Skillz (SKLZ 1.85%). The stock surged to $46 per share after striking a partnership with the National Football League back in February, but investors have since soured on it, selling it down to less than $10 per share this month, a staggering 80% decline.
The stock's price movement might give the impression that the business is on the verge of failure, but not so fast. Here are three reasons Skillz could have a much better narrative in the future.
1. Skillz has plenty of cash on hand
One of the primary cases against Skillz is the company's rapid cash burn. Management is spending a ton of money on sales and marketing to help drive growth by acquiring users in the growing mobile gaming industry.
Through three quarters of 2021, Skillz has generated $275 million in revenue but has spent $310 million on sales and marketing. It's one thing to be spending cash on growing a company, but to have sales and marketing alone eclipse the entire company's revenue indicates that Skillz is a very long way from turning a profit.
Investors might be concerned about the viability of the business and whether they might see the value of their shares depressed if the company has to issue new stock to raise money. However, this shouldn't be a significant threat in the short term. Skillz currently has about $540 million in cash on its balance sheet, enough to fund the business for more than a year at its current spending pace.
2. Multiple ways to bring down user acquisition costs
Much of the company's marketing expenses go toward incentivizing users to participate in paid competitions on the platform, of which Skillz currently takes 16.7% (this is where revenue comes from). At some point, Skillz will need to lower how much it spends on acquiring its users so that revenue can better outgrow expenses.
Fortunately, there are multiple ways it can do this. Skillz recently acquired ad-tech platform Aarki for $150 million in cash and stock. The company will be able to shift part of the advertising budget it uses to pay for impressions, which are basically instances when an ad is seen by a consumer, to Aarki's platform, saving Skillz money by bringing this process in-house.
Skillz can also progressively attract new users to its platform as the games it supports improve in quality. Games like Blackout Bingo that are currently the most popular games on Skillz had to organically grow to what they are today. More established franchises like Call of Duty, for example, would bring users to the platform without so much spending to attract players.
The company is slowly forming partnerships with some of these more popular franchises, this year launching Big Buck Hunter, a popular arcade game with a following of its own. Trivia Crack is in the early stages of launching a Skillz-compatible game called Trivia Crack Payday. Trivia Crack is the most popular mobile trivia franchise in the world with more than 150 million active users worldwide. Developing and launching a game compatible for use on the Skillz platform can take more than a year, so investors need to be patient with these developments.
3. Two big potential events coming in 2022
Next year could be a potentially game-changing year for the stock's trajectory. Remember that NFL partnership that pushed the stock to its highs? Skillz and the NFL are holding a developer challenge to bring one (or multiple) NFL-themed mobile games to market. The challenge is currently in its "game development phase," which expires at the end of the year. Eventually, winning games will be chosen.
The winning games are scheduled to launch later in 2022, before the NFL season kicks off, and will receive marketing support from both Skillz and the NFL. The NFL is one of the world's most powerful sports brands, which means that Skillz could see a large uptick in users from these games.
Skillz is also launching in India soon, its first major geographic expansion effort. CEO Andrew Paradise has been talking about the entry into India since the company went public, and the company recently hired Vatsal Bhardwaj from Amazon as chief product officer. Bhardwaj has experience in the Indian market, which is probably not a coincidence.
India's mobile gaming population is rapidly growing from $1.8 billion and could reach $6 billion to $7 billion in value by 2025, so this is a huge opportunity for Skillz to entrench itself in a hot market.
No risk, no reward
Admittedly, a lot of what could go right for Skillz over the next several quarters includes many instances of the word if. There is no debate that Skillz itself is a young business and a risky investment.
However, the market cap is less than $4 billion, while the market that Skillz operates in is worth many billions more. There is a lot of upside potential here if the company is able to execute its announced plans. Investors will need to have some patience and faith, but the payoff could be worth the risk.