Mobile-gaming competition platform Skillz (SKLZ 0.96%) could do no wrong when the stock soared to $46 per share on news of a partnership with the National Football League (NFL) early last year. Since then, investors have had to watch in horror as shares dropped nearly 90% to under $5 per share today.
It's hard to find the positive in a stock that most are almost surely down on. However, investing is about looking forward, and there are reasons to believe that Skillz can still be a long-term winner. Here are two reasons to consider owning shares and one reason it could be game over.
Reason to sell: Skillz is rapidly losing money
To address the elephant in the room let's start with the bad; after all, the stock has been a complete loser for shareholders since going public a year ago by merging with a special purpose acquisition company (SPAC). The concept of Skillz is compelling: Its platform gives a "Shopify-like" kit of software tools to enable mobile-game developers to implement competitive gaming for real cash and prizes. Players pay into a paid match, and Skillz takes a small percentage of the pot as its revenue.
Management is spending aggressively to acquire users to drive growth, which is understandable given the potential upside of mobile gaming and Skillz's unique business model. Although, the losses are far more significant than what management initially estimated. For example, the original investor presentation given before Skillz came public called for 2021 adjusted EBITDA (earnings before interest, taxes, deprecation, amortization) of negative $14 million, followed by the company turning profitable (by this metric) in 2022.
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However, the company's adjusted EBITDA in the third quarter of 2021 alone was -$41.7 million. CEO Andrew Paradise explained this by indicating that the company's gotten more aggressive with its spending to penetrate its target market. Still, it's fair to wonder whether Skillz could have sustained its 70% year-over-year revenue growth in Q3 2021 without this increased spending. The company spent more on sales and marketing in the quarter than it generated in total revenue, so Skillz needs to show that it can grow without these massive losses to be a successful business over the long term.
Reason to buy: Platform games are getting better
The first and most apparent solution is that Skillz gets better games on its platform. The mobile gaming industry is worth $86 billion according to Skillz and is growing at a double-digit rate. Skillz remains a very small player in the industry, the GMV, or total value of matches played on its platform, was just $611 million in its most recent quarter, Q3 2021.
As an up-and-coming platform, it's not going to have Call of Duty or some other mega-blockbuster game on day one. Currently, its top games are stuff like bingo, pool, and solitaire. With these games, it makes sense why the company would probably need to advertise a ton to bring people on board.
But as more well-known games come on board, they could begin to bring in users just with name recognition. If Skillz had the next Madden Football game on its platform, Skillz could likely spend less on marketing to attract gamers. The company's making progress here; it just launched Big Buck Hunter, a classic arcade hunting game. It's also in the early stages of launching Trivia Crack on Skillz, the world's top mobile trivia game.
Skillz has also invested $50 million in a partnership with Exit Games, giving it access to its multiplayer game-engine Photon, which powers many real-time multiplayer games. Skillz games developers can now bring real-time games to the platform, potentially leading to more popular categories like combat and war games.
Reason to buy: NFL partnership could open doors
Professional sports leagues make their money from the fans, so they are particularly eager to try new ways to monetize their customer base. The NFL partnered with Skillz on a developer challenge to create new games marketed to NFL fans and played on the Skillz platform. The NFL is one of the most well-recognized brands globally and could bring an influx of new users to Skillz, precisely what the company needs.
The challenge is in the semifinals currently, with one or more winners expected to launch games next fall in time for next year's NFL season. This doesn't help the stock today, but investors could start looking ahead once Skillz announces the winning games.
Electronic Arts is the game developer behind the Madden football franchise; its free-to-play mobile game Madden 22 generates an estimated $3 million in revenue per month from optional purchases. A game that enabled real prizes and wagering could potentially exceed this, which could mean loads of financial opportunity for Skillz.
The NFL deal represents more at stake than simply some new games, and this is a massive chance for Skillz to prove its value to other brands out there. If the NFL partnership is a success, other leagues and brands may want to work with Skillz, a considerable step toward potential growth. Skillz even brought Jerry Bruckheimer -- part-owner of the NHL's Seattle Kraken hockey team and a very connected person inside Hollywood -- onto its board.
I like many of the moves that Skillz has made, and I think they can lower Skillz's marketing costs while supporting long-term growth. Unfortunately, many of these opportunities are long-term, and the reality today is that Skillz is losing money quickly. Until that changes, Skillz stock could struggle to maintain a lot of upward momentum. If things work out, however, Skillz continues to have a ton of potential upside over the years ahead.
