Back in December 2020, Skillz (SKLZ 0.96%) went public by merging with Flying Eagle Acquisition Corp., a special purpose acquisition company (SPAC) led by Hollywood industry veterans Harry Sloan and Jeff Sagansky.
The gaming platform company's stock started trading at $17.89 after the merger, then skyrocketed to an all-time high of $46.30 last February. But today it trades at about $3 per share. Therefore, a $1,000 investment in Skillz when it just started trading publicly would have briefly blossomed to nearly $2,600 before withering to just $170.
Let's review why Skillz initially attracted so much attention, why it quickly burned out, and whether or not it will ever recover.
Image source: Getty Images.
Why were investors drawn to Skillz?
Skillz's gaming platform hosts multiplayer arenas and real money tournaments for other games. It doesn't develop any games of its own.
Creating multiplayer features can be time-consuming and difficult to scale for smaller developers, so it makes sense to outsource those services to Skillz. That streamlined approach attracted a lot of attention from disruption-oriented investors like Ark Invest's Cathie Wood, who initially accumulated a large stake in Skillz.
Skillz's growth rates were also impressive. Its revenue surged 92% to $230 million in 2020, and it ended the year without any long-term debt. Its total number of monthly active users (MAUs) grew 63% to 2.6 million, while its paying MAUs more than doubled to about 324,000.
That audience was small, but Skillz claimed it still had plenty of room to grow as more developers added multiplayer features to their games. That rosy long-term outlook caused the bulls to gloss over its staggering net losses, which widened from $24 million in 2019 to $122 million in 2020.
Why did investors head for the exits?
Skillz's revenue increased 67% to $384 million in 2021, but its net loss widened again to $181 million. Its MAUs grew just 15% to 3 million, while its number of paid MAUs increased 57% to about 510,000.
As Skillz's growth decelerated and its losses widened, its flaws became impossible to ignore. First, it generated 72% of its revenue from just three games from two studios -- Tether Studios' Solitaire Cube and 21 Blitz, and Big Run Studios' Blackout Bingo -- in 2021. It generated 79% of its revenue from the same three games in 2020. That customer concentration indicates that Skillz is struggling to grow its audience.
The bears also pointed out that Skillz usually takes a 50% cut of a developer's revenue. That massive cut, which Skillz still can't squeeze a profit from, is much higher than the 30% cut that Apple (AAPL 1.27%) and Alphabet's (GOOG 0.74%) (GOOGL 0.55%) Google usually retain from their in-app purchases. Therefore, many developers will likely prefer to craft their own multiplayer features with an industry-standard game engine like Unity Software (U 2.04%) instead of dealing with Skillz's high fees.
In 2022, Skillz expects its revenue to only grow about 4% to $400 million, which broadly missed analysts' expectations for 43% growth at the time. That shocking slowdown, which Skillz blamed on a planned reduction to its marketing expenses to curb its losses, crushed the stock and caused many of its biggest backers -- including Cathie Wood -- to liquidate their positions.
Skillz is trying to rein in its marketing expenses by integrating its recent acquisition of the ad tech company Aarki, but that strategic shift forced it to take on a lot more debt. Last December, Skillz raised $300 million with an offering of secured senior notes, which mature in 2026 with a whopping interest rate of 10.25%. Its debt-to-equity ratio of 0.6 is still manageable, but its slowing growth, widening losses, and dwindling liquidity ($241 million in cash and equivalents, with $319 million in marketable securities) all indicate it will likely need to take on more debt in the future.
Will Skillz ever recover?
With a market cap of $1.29 billion, Skillz trades at about three times its estimated sales for 2022. That price-to-sales ratio might seem low, but the stock is cheap because its business model seems broken.
For Skillz to recover, it will need to meaningfully diversify its customer base beyond Big Run and Tether, reduce its developer fees, stabilize its top-line growth, and narrow its losses. That's a lot to accomplish, especially as rising interest rates boost borrowing costs for unprofitable companies.
Simply put, Skillz -- like many other beaten-down SPAC-backed listings -- still seems more like a start-up than a publicly traded company. It won't go bankrupt this year, but I don't expect its stock to recover anytime soon.
