Skillz (SKLZ 4.02%) stock is down 15.4% after the company reported earnings on Feb. 24. Investors were not pleased with continued losses on the bottom line.
To make matters worse, management has remained on the same path for the last several quarters, investing aggressively in sales and marketing. The stock price's fall after earnings is on top of a more massive crash last year. Is the stock finally cheap enough to buy? Let's address that below.
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Investing aggressively in growth
For its fiscal year ended Dec. 31, Skillz delivered revenue of $384 million. That was solid growth on top of the $230 million it reported for 2020 and just $120 million in 2019. In other words, Skillz has tripled revenue in two years.
It offers a unique gaming service; players can wager real money on the outcome of games played on the Skillz platform. Of course, that makes the games more enjoyable than others with no tangible benefits from winning. You might say that is nothing new; gambling businesses have been around forever. Therein lies the significant difference. Because games on the Skillz platform are based on skill and not on chance, it is not regulated as a gambling business. That has implications concerning market access and cost savings.
Management appears very confident with the thought that if it makes customers aware of Skillz, they will join in large numbers. That's apparent in its massive investment in sales and marketing. In the 12 months ended Dec. 31, Skillz spent $465 million on sales and marketing, well above the revenue for the year noted above. The result is growth in monthly active users from 320,000 to 510,000.
Another way to look at it is that sales and marketing expenses increased by 85% while the number of paying monthly active users increased by 59%. Sales and marketing spending has benefits beyond the period they are incurred. Still, to simplify things, you can consider that Skillz spent $465 million to acquire 190,000 customers -- a customer acquisition cost of $2,447 each. That's a high price to pay for players with an average monthly revenue per user of $62.40 in 2021.
Interestingly, Skillz outsources game development to third parties. The company then pays them a percentage of the revenue their creations generate. Exciting games drive customer growth, and it poses the question of whether Skillz would be better off investing more in game development rather than marketing.
Regardless, management has chosen its path and looks like it is sticking to it. For 2022, Skillz will only modestly decrease investment in sales and marketing as a percentage of revenue.
NYSE: SKLZ
Key Data Points
Is Skillz stock a buy right now?
The market was not pleased with the company's progress and its decision to stay on course -- and so the stock has been down about 15% since the earnings report. Looking back over the past year, Skillz shares are down an astounding 91%.
On the one hand, you can admire management for staying on course despite clear signs of displeasure from the market. On the other hand, it could be a troubling sign that the company is not adjusting to investor feedback. In any case, it would be prudent for investors to wait for better returns on marketing before accumulating shares of Skillz.
