What happened
Shares of mobile esports platform Skillz (SKLZ -2.09%) plunged 35.3% in February, according to data from S&P Global Market Intelligence.
Skillz reported an abysmal fourth quarter and issued even more worrying guidance. I recently took a small position in the stock after it had fallen 90% from all-time highs last year. As it turns out, just because a stock has gone down 90%, that doesn't mean it can't go lower! After looking at the numbers and guidance, I exited my recent position with a loss.
So what
Skillz grew its revenue 61% in Q4, which may sound impressive. However, gross margins shrank, and net losses widened 50% over the prior-year quarter to $99 million. Both revenue and the bottom line missed expectations.
Yet as bad as Q4 was, 2022 guidance was even more troubling. For 2022, management guided to just $400 million in revenue, massively below what analysts were projecting, amounting to a growth rate of merely 4.1%. That would be quite a deceleration from the 67% growth seen in full-year 2021!
The reason for the drop-off appears to be that Skillz is going to spend less on "engagement marketing" in 2022 in order to rein in spending. This type of marketing isn't an expenditure to acquire new customers. These are discounts and incentives to get existing customers to play more and spend more on the platform. Skillz plans to reduce its engagement market by 10 percentage points as a percentage of revenue this year, so management did say that revenue after engagement marketing (RAEM) would amount to $245 million, an increase of 24%. That's a better growth rate, but it amounts to much lower real revenue.
The lower revenue guidance indicated to me that Skillz is having a hard time retaining users and engagement without these incentives. That's a worrying sign.
In addition, Skillz said it wasn't going to invest significantly in India this year, despite announcing a live pilot in India as recently as January. That much of an about-face is also a reason for pause.
Image source: Getty Images.
Now what
As stated, I abruptly exited my small Skillz position with a loss after reading this report. A contrarian might say that the stock looks cheap today, at just a $1.2 billion market cap, or just three times this year's projected sales, along with $443 million in net cash.
However, that cash could be used up soon as the company invests in growing the business. Management seems worried about expenditures, explaining the lower engagement marketing and nixing the India venture (for now). But if users aren't "sticky" once acquired, it's hard to trust the trajectory and durability of revenue. As such, Skillz is too risky for all but the most speculative investors who may have greater insight into the emerging gaming platform than I do.
