Skillz's (SKLZ -2.09%) stock price plunged 31% during after-hours trading on Feb. 23 following its fourth-quarter earnings report.
The social gaming platform company's revenue rose 61% year over year to $109 million, which missed analysts' estimates by $5 million. Its net loss widened from $67 million to $99 million, or $0.25 per share, which also missed the consensus forecast by a dime.
Skillz's stock has now declined 95% from its all-time high of $45.55 per share -- which it briefly hit during the Reddit-fueled rally a year ago. Unfortunately, three bright red flags indicate it could still drop even further.
Image source: Getty Images.
1. Skillz is seeing decelerating growth in users and revenue
When Skillz went public by merging with a special purpose acquisition company (SPAC) in December 2020, the bulls claimed it would disrupt the way multiplayer features were integrated into mobile games. Instead of developing those features from scratch -- which can be time-consuming, buggy, and tough to scale -- developers could simply tether their games to Skillz's platform, which hosts multiplayer matches and real money competitions.
However, Skillz's monthly active users (MAUs) only rose 15% to 3 million in 2021 -- which represented a slowdown from its 63% growth in 2020. Within that total, its number of paid MAUs (PMAUs) grew 57% to 510,000, but that also marked a deceleration from its 101% growth in 2021.
That's also a tiny sliver of the 2.2 billion active mobile gamers worldwide. If Skillz's platform is as disruptive as it claims, it needs to grow a lot faster.
Skillz's growth in average revenue per user (ARPU) and average revenue per paying user (ARPPU) accelerated in 2021 but couldn't fully offset its decelerating user growth. As a result, its total revenue and gross merchandise volume (GMV) growth decelerated significantly for the full year:
|
Period |
FY 2020 |
Growth (YOY) |
FY 2021 |
Growth (YOY) |
|---|---|---|---|---|
|
MAUs |
2.6 million |
63% |
3.0 million |
15% |
|
ARPU |
$7.49 |
19% |
$10.90 |
46% |
|
PMAUs |
324,000 |
101% |
510,000 |
57% |
|
ARPPU |
$59.30 |
(4%) |
$62.40 |
5% |
|
GMV |
$1.59 billion |
80% |
$2.44 billion |
53% |
|
Revenue |
$230 million |
92% |
$384 million |
67% |
Data source: Skillz. YOY = Year-over-year.
But it gets much worse: Skillz expects its revenue to grow just 4% to $400 million in 2022, compared to analysts' expectations for 43% growth.
Skillz blames that abrupt deceleration on a planned reduction to its marketing expenses to curb its losses. However, it could also be caused by its heavy dependence on three aging games (Solitaire Cube, 21 Blitz, and Blackout Bingo) -- from two developers (Tether and Big Run) -- to generate 73% of its revenue in the first nine months of 2021.
We won't know Skillz's latest customer concentration numbers until it releases its annual report -- but they probably haven't improved.
2. Skillz losses are widening
A quick look at Skillz's bottom-line growth -- by both generally accepted accounting principles (GAAP) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) measures -- reveals why it's willing to sacrifice its future user and revenue growth for tighter cost controls:
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
|---|---|---|---|
|
Net income (GAAP) |
($23.6 million) |
($145.5 million) |
($181.4 million) |
|
Adjusted EBITDA |
($22.8 million) |
($66.1 million) |
($182.3 million) |
Data source: Skillz.
But those cost controls won't help Skillz achieve profitability anytime soon. It still expects to post a negative adjusted EBITDA margin of about 37% in 2022, compared to a negative adjusted EBITDA margin of 47% in 2021.
3. Skillz has an unsustainable business model
Skillz racked up those staggering losses even though it takes a 50% cut of the revenue generated by its hosted games. That's much higher than the 30% cut that Apple and Alphabet's Google usually retain from their in-app purchases.
That massive gap could persuade developers to create their own multiplayer arenas instead of paying Skillz's fees. It could also convince them to seek out better alternatives -- like Unity Software's integrated multiplayer services for its market-leading game engine, which already powers roughly half of the world's mobile, PC, and console video games.
Skillz could still go a lot lower
Skillz still has a market cap of about $1 billion, or 2.5 times its estimated revenue for 2022, after its post-earnings plunge. That price-to-sales ratio might be low for a company that generates double-digit percentage sales growth, but Skillz just told investors to expect low single-digit growth this year.
Therefore, I wouldn't be surprised if this stock price gets cut in half -- or more -- in this unforgiving market for growth stocks that abruptly stop growing.
