Skillz (SKLZ 0.79%) is scheduled to report fiscal 2021 fourth-quarter earnings after the market closes on Feb. 23. The company is struggling to sustain growth amid economic reopening.
The coronavirus pandemic was good for Skillz's business. Millions of people were stuck at home and looked to entertainment options they could consume in the safety of their homes. That's good news for a mobile gaming company. Now, as economies are reopening, people are leaving their homes more often -- a trend that has not worked in Skillz's favor.
Customer growth is slowing for Skillz
Indeed, from the fourth quarter of 2019 to the first quarter of 2021, Skillz more than doubled its paying monthly active users from 177,000 to 467,000. As economic reopening gained momentum, customer growth slowed. As of the end of its third quarter of 2021, Skillz had 509,000 paying monthly active users. The slower growth is not for lack of trying.
In its most recent quarter, ended Sept. 30, 2021, Skillz spent $114 million on sales and marketing while earning revenue of just $102 million. Similarly, in the nine months ended Sept. 30, 2021, Skillz spent $310 million on sales and marketing, on revenue of $275 million. Unsurprisingly, aggressive spending leads to massive losses on the bottom line, and investors are concerned with mediocre returns on that spending.
To be more accurate, concerned would be an understatement. The stock is down 68% in the last three months and an incredible 89% in the previous year. One reason the market is selling Skillz stock so aggressively could be what it deems poor judgment on management's behalf. If the spending on sales and marketing is bringing such lackluster results in revenue and customer growth, why sustain the high level of investment?
To be fair, management probably sees value in that investment. Otherwise, why would it spend over 100% of revenue in the category?
Regardless, the market is not happy with the combination of outcome and marketing. When Skillz reports Q4 results on Feb. 23, investors will be looking for a better return on the marketing investment or a much better explanation of why management is sustaining the spending.
What this could mean for Skillz investors
Analysts on Wall Street expect Skillz to report revenue of $113.95 million and a loss per share of $0.15. If it meets those projections, it would be an increase of 68.30% and a decrease of 15.38%, respectively, from the same period the year before.
This will be an instance where it will matter where those growing losses on the bottom line are emanating from. If management has changed tactics and is shifting to a new area of spending, it could be a catalyst that reverses the downfall of Skillz stock. If investors see more of the same from Skillz in Q4, it could be difficult for the stock to make gains.