The coronavirus pandemic is creating volatility in the stock market. The broader economy has gone through an abrupt shutdown of nonessential businesses, and more recently, reopening.
Stopping and starting a $20 trillion economy is not an easy thing to do, and the process has unsurprisingly had hiccups. Penn National Gaming (PENN 2.48%) and Skillz (SKLZ -1.63%) are two companies that struggled as economies reopened. However, that could be an opportunity for long-term investors.
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Penn National Gaming
Penn National Gaming is a regional brick-and-mortar casino operator expanding into mobile gaming. That's primarily the cause for the fall in its stock price in 2021. At the onset of the pandemic, when brick and mortar casinos were forced to shut their doors to patrons, it boosted signups and engagement for online gaming.
The market values Penn's mobile gaming business differently than its live casinos. That's understandable. Mobile gaming has the potential to be more lucrative than physical gaming properties. For one, mobile gaming requires significantly fewer staff to operate. You don't need cashiers, dealers, porters, floor staff, guest services, etc.
On the revenue side, mobile gaming is more easily accessed. Consider that folks in some locations could be a several-hour drive away from their closest casino. The long-distance drive could discourage visitation and frequency. Compare that to an app in your pocket, where you can go from an impulse to wager in seconds.
The segment that includes Penn's mobile gaming business is growing exponentially. In the nine months ended Sept. 30, revenue increased to $282 million, up from $72 million in 2020 and $32 million in the year before that. The economic reopening will not end this growth, but it might slow it down.
Over the last decade, Penn averaged earnings before interest and taxes with a margin of 16.7% . At maturity, the addition of a robust mobile gaming business could expand profit margins further still.
Skillz
Skillz is a unique mobile gaming company. It offers players the option to wager on games played against each other. Because its games are based on skill instead of chance, Skillz operates with less restrictive gaming regulations.
The company thrived at the onset of the coronavirus pandemic as millions of folks were cooped up indoors and looking for in-home entertainment options. From the fourth quarter of 2019 to the first quarter of 2021, Skillz more than doubled its paying monthly active users (MAU) from 177,000 to 467,000. It's having a more challenging time growing its user base since economic reopening gained momentum.
Management is still spending aggressively, intending to attract new users. Sales and marketing expenses for Skillz in the nine months ended Sept. 30 totaled 112.7% of revenue. The combination of aggressive spending and modest user growth -- between Q1 and Q3 Skillz grew MAU from 467,000 to 509,000 -- caused the stock price to fall by 62% in 2021.
Investor takeaway
Skillz is in the early stages of its development, and new features and games could fuel growth over the long run. Also, the stock price crash has Skillz selling at its lowest price-to-sales (P/S) ratio all year.
Similarly, Penn National Gaming's stock price crash of 42% in 2021 has it selling at a third of the P/S ratio it was trading for earlier in the year.
Penn National Gaming and Skillz got slammed in 2021. Their stocks are selling at significantly lower prices than earlier in the year. That could make investing in these businesses with growth ambitions worthwhile in 2022.
