Skillz (SKLZ 2.67%) stock was up over 20% following its investor day on March 15. The rise was a welcome sign to shareholders. Even after the rise of more than 20%, Skillz stock is still down 61% year to date in 2022.
The market has fallen out of love with unprofitable growth stocks, and Skillz falls in that category. The company is growing revenue rapidly but reporting losses on the bottom line. Growing efficiently appears to be the most significant challenge Skillz is facing, and management highlighted some steps it's taking toward that aim.
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Skillz is aiming to optimize marketing investments
Skillz's most notable expenses are sales and marketing. In the year ended Dec. 31, 2021, Skillz spent $465 million in the category while it earned $384 million in revenue. Similarly, in the year ended Dec. 31, 2020, Skillz spent $252 million on sales and marketing on revenue of $230 million. It spent more than 100% of its revenue on sales and marketing in both cases. The next-closest expense item is only a fraction of sales and marketing.
The returns from that investment are not impressive. For instance, Skillz increased sales and marketing by $213 million year over year, and revenue only grew by $154 million. Despite the less-than-mediocre returns, management has kept up the investment. The ongoing strategy has turned off many investors, resulting in a dramatic stock price crash.
At its investor day on March 15, management updated investors on its plans to spend more efficiently. For one, Skillz will allocate more marketing dollars through its recently acquired demand-side advertising platform Aarki. Chief Revenue Officer Casey Chafkin believes this allocation can capture 20% to 30% of the margin it is giving away to outside demand-side platforms.
Further, in 2022, Skillz aims to eliminate low-return engagement marketing. The company segregates marketing spending into two parts: user engagement and user acquisition. User acquisition is what it sounds like, spending money to acquire players. User engagement is an incentive to get existing players to enter more contests and play more often. An example of engagement marketing is a deposit reload bonus. For instance, it could offer $20 bonus cash if a player reloads $100 into their account.
Skillz has collected data on the returns from these kinds of initiatives and will be eliminating the lowest-performing ones. At the same time, Skillz is testing new programs to find something that works more efficiently.
What's ahead for Skillz?
It's a good sign for shareholders that management acknowledges the low return on investment in marketing spending. You would think that such low returns would prompt a decrease in spending on the category, but that has not been the case for Skillz. Instead, it ramped up spending year over year in 2021. Hopefully, 2022 will bring progress for shareholders, and Skillz will either find more efficient modes of marketing or allocate growth investment to other categories like game development.
