In an ongoing rout of small, fast-growing, but loss-generating companies, Skillz (SKLZ -4.58%) stock was down 6% today as of market close. There was no news to cause the decline, just continued poor investor sentiment that has been hurting Skillz in the last month or so since the omicron variant first showed up on the scene. With just days until the new year, shares have now lost some 63% of their value in 2021.
Skillz is undeniably a high-octane business operating in the young esports industry. Revenue grew 70% year over year in Q3 2021 to $102 million. However, the market has turned against companies that operate at a loss, even if the strategy is to do so intentionally to maximize growth now in lieu of bigger profits later. Free cash flow was negative $132 million over the last trailing-12-month period.
Also impacting the mixed emotions many have regarding Skillz is the recently completed $300 million cash raise via a new debt offering. Because of the risk involved with Skillz's business at this stage, the interest rate on this debt (which matures in 2026) is a hefty 10.25% (although total borrowing costs could wind up being much lower than that over time). At the end of September, Skillz had no indebtedness and $540 million in cash and equivalents on balance.
Given its aggressive spending on marketing and the acquisition of ad platform Aarki this year, it's not surprising Skillz wanted to replenish its coffers. Nevertheless, the debt introduces a new element of risk for shareholders to monitor.
At this stage, the market has significantly unwound much of the optimism that was being baked into Skillz's share price earlier this year (when the stock more than doubled in the first month of 2021). Now trading for about 5.5 times next year's expected sales, this could be a long-term value in the making -- but expect plenty more volatility ahead for this high-risk, high-reward stock.