Mobile gaming competition platform Skillz (SKLZ 0.40%) was a darling within the investment community about a year ago when it soared from the low $20s to more than $45 per share on a partnership with the National Football League (NFL). But the stock has plummeted nearly 90% in just one year, in part thanks to the ongoing tech and growth stock sell-off.
A lot is going on at the company, and investors will probably be looking for some critical updates to help instill confidence in the company's future. Here are three burning questions that investors need to know about heading into earnings this week.
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1. Is cash burn slowing?
Skillz is currently losing a lot of money from its business, arguably the main problem for the company right now. Skillz spends enormous amounts of money on advertising to potential users and existing users in order to keep them playing. Skillz brought in $275 million in revenue through the first nine months of 2021, which it does by taking a small percentage of the money that people compete for on its platform. The problem is that the company has spent more on sales and marketing alone than revenue to generate that revenue.
When you begin factoring in additional costs like $30 million for research and development or $42 million for share-based compensation, you can see how the financials get ugly fast. Founder and CEO Andrew Paradise has reiterated on repeated earnings calls that the company is investing in building a user base. Still, the company needs to stop burning so much cash at some point.
The company's total operating losses through the nine months of 2021 are $183 million, and the balance sheet has $540 million in cash. So while the company has adequate money for the short term, it's not sustainable forever. Having marketing costs slow down while revenue keeps growing would be a tremendous step in the right direction.
2. Is user growth still strong?
Management has shown that paying players tend to remain on the platform over the long term, which would help justify prioritizing user growth. Skillz needs user growth to remain strong considering how much it is spending on marketing.
Instead, it's been a little lumpy throughout this year, which could be partially explained by tough comparable figures coming off 2020 lockdowns when people were staying home. The company had 467,000 paying monthly active users (MAU) in first-quarter 2021, which declined to 463,000 the following quarter. Fortunately, paying MAUs resumed growth in third-quarter 2021, to 509,000, but it will be important that paying users keep growing in the fourth quarter instead of losing momentum.
Looking further out, getting more popular games up and running on the platform might help Skillz bring players on board without advertising so much. Some popular franchises recently launched Skillz games, including Trivia Crack and Big Buck Hunter.
The company could benefit from incorporating some games that can be played head-to-head in real time, like shooting games or fighting games. Skillz invested in a multi-player gaming engine for this exact purpose, but it could take time for game developers to implement this into upcoming games.
3. What is the status of the India launch?
India is one of the most heavily populated countries globally with nearly 1.4 billion people; it's also becoming a hot gaming market. Mobile games generate an estimated 86% of gaming revenue because smartphones are cheaper and more accessible than gaming consoles or computers, and gaming revenue could grow from $1.8 billion to more than $5 billion by 2025.
Skillz announced that it had officially launched its testing phase in India at the beginning of the year. The company is starting with its in-house "test game" Diamond Strike to help get players onto the platform and try out features before fully rolling out third-party games.
Investors will want to keep an ear out for any commentary by management on India's estimated "ramp up" schedule to see when and how it might contribute to the business.
An investment not without risk
Skillz has a strong cash position, so I don't think it's fair to say that the company is in any near-term danger of closing its doors. However, Skillz is a riskier investment at this point and likely will be until its revenue can grow without spending so much on marketing to do it.
Investors should approach the stock with caution and understand that the company needs to prove itself, a process that will probably take multiple quarters before the broader market buys into Skillz's story again.
The company will give investors a lot of new information next week, and hopefully, management will answer some of these questions either directly or with operating results. If you can manage your risk and tolerate the inevitable ups and downs along the way, Skillz presents a high-upside stock idea worth considering.
