Since peaking in early 2021, shares of mobile-gaming platform company Skillz (SKLZ 4.35%) have plummeted by a staggering 92%. However, as atrocious as that result has been, buy-and-hold investors understand that it's more important to monitor the underlying performance of the business rather than fixating on the stock price.
When it comes to Skillz's underlying business performance, it's come up short in various areas. The company's one redeeming attribute to this point was overachieving in regards to revenue growth. However, that's no longer the case and a recent guidance shift from management is perhaps the most alarming development to date.
NYSE: SKLZ
Key Data Points
The good
Skillz stock officially started trading in December 2020. Since then, it's reported quarterly financial results five times. During the first four reports, management habitually beat revenue expectations and raised its forward guidance.
| Quarter |
Revenue Guidance | Actual Revenue | Percentage Beat | Full Year Revenue Guidance |
|---|---|---|---|---|
| Q4 2020 | $63 million | $68 million | 8% | $366 million (for 2021) |
| Q1 2021 | $80 million | $84 million | 5% | $375 million |
| Q2 2021 | n/a | $90 million | n/a | $389 million |
| Q3 2021 | n/a | $102 million | n/a | $389 million |
| Q4 2021 | $113.8 million | $109 million | (4%) | $400 million (for 2022) |
Data source: Skillz.
Overachieving on revenue was important for Skillz, in my opinion. Newly public companies lack track records, and can only build them over time. When a management team like Skillz's beats its revenue forecasts often, it suggests it has a good handle on the business.
Skillz has beaten revenue expectations partly because management doesn't factor anything new into its guidance. For example, it's guiding for $400 million in 2022 revenue. But that figure doesn't account for any new games that might launch or new geographies it might enter this year. Those will be bonuses. So we could see guidance raised at some point as things develop.
Image source: Getty Images.
The bad
While it was beating its revenue guidance, Skillz was underperforming on its efforts to reach profitability.
Skillz was brought public via a special purpose acquisition company (SPAC). In its SPAC presentation, management forecast losses in 2020 and 2021. For those years, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were expected to be losses of $47 million and $14 million, respectively. In reality, adjusted EBITDA was negative $66 million in 2020 and negative $182 million in 2021.
In other words, in the past two years, Skillz has lost $187 million more than it said it would when its SPAC merger was first announced.
These losses are steep. But optimistic investors like myself could still be hopeful. Skillz was spending a ton on sales and marketing ($717 million in 2020 and 2021 combined) -- but at least that spending was paying off with strong top-line growth.
Now Skillz management says it's dialing back the revenue expectations as well. It's guiding for growth of 4% to $400 million in 2022. Not only is that tepid growth, it's a mile away from its SPAC presentation forecast of $555 million in 2022 revenue.
And now the ugly
Skillz management realizes that its updated revenue guidance will be a tough pill to swallow. Therefore, it's not too surprising that it introduced a new metric that it wants investors to focus on instead: revenue after engagement marketing.
The revenue-after-engagement-marketing metric is worthy of deep exploration. But for our purposes here, suffice it to say that Skillz's management is framing this as a focus on profitable growth as opposed to growth at any cost. In other words, revenue growth will slow down to improve the bottom line. Given its steep losses to date, that prospect sounds exciting, at first.
However, in its recent investor day presentation, Skillz's management was asked about when the business would break even on an adjusted EBITDA basis -- perhaps the easiest profitability bar to clear. It responded that it expected to break even at some point in 2024 on a quarterly basis. Full-year profitability, therefore, won't come until 2025 at the earliest.
Again, going back to the SPAC presentation for perspective, Skillz originally forecast that it would break even in 2022. And that was before the heightened focus on profitability. Now management believes that if it tries hard and slows down revenue growth, it can achieve that goal three years behind schedule.
The takeaway
There may be some reasons for optimism for Skillz shareholders like myself. But in my opinion, the goalposts are being moved too frequently for me to consider investing more money in the stock today. Management's public track record has simply been too inconsistent to have a high degree of confidence that it can reach its profitability targets.
For now, I'd recommend watching to see if this new focus truly leads to adjusted EBITDA improvements. If it does, then maybe management will be on its way to restoring its credibility with investors.
