San Francisco-headquartered Skillz (SKLZ 7.42%) brings a sense of friendly competition to enthusiastic gamers worldwide. As the video game mania that flourished during the initial onset of the COVID-19 crisis fades, however, investors have every reason to question whether Skillz can remain competitive or even viable as a business.
In Skillz' first-quarter earnings call, CEO Andrew Paradise seemed to brim with confidence one moment, but in the next breath he'd acknowledge he's "certainly not satisfied with the current financial results." If Paradise is an ambivalent hype man, investors are left to read between the lines and assess Skillz' outlook for themselves.
So read between the lines we will, and analyze the data we must. At the very least, we can commend the company's foray into what might turn out to be an important area of the gaming market -- or it might not, and that's a risk shareholders must be willing to accept.
As Skillz stock has cratered from nearly $25 to under $2 in less than a year, the burden of proof rests firmly on the company to demonstrate -- show, not tell -- its value to shareholders. To this end, Paradise has set a seemingly achievable goal of "targeting to reach breakeven as a business by the end of 2024." That should be simple enough, right?
Maybe yes, maybe no. Even as Paradise proclaims, "This quarter, we commenced our transition to profitable growth," the data suggests otherwise. Sure, Skillz celebrated a 12% year-over-year revenue increase in the first quarter, but its net loss catapulted from an already unnerving $54 million in the prior-year period to $148 million in this latest quarter.
In defense of the dismal-looking bottom line, Skillz stated that $65 million of that $148 million loss was attributable to "non-recurring stock-based compensation expense related to the cancellation of performance stock units previously granted to the CEO." Even if we allow this, though, Skillz is still left with an $83 million net loss -- not exactly what a skeptical investor might consider a "transition to profitable growth," or even targeting breakeven, for that matter.
Later in the conference call, Paradise acknowledged the obvious by stating that he "definitely can't control the stock price" while echoing the theme of "increasing profitable growth." If anything can get Skillz on a profitable path, it could be the company's recent launch of its cloud-gaming feature.
Skillz' quarterly press release touts the benefits of introducing cloud gaming onto its platform. Apparently, cloud-based gaming eliminates some of the friction and frustration gamers experience during the discovery and installation process. By embedding cloud-gaming technology into a playable ad, Skillz could potentially make gaming platform-agnostic while reducing the company's user acquisition costs.
This could, if you'll excuse the pun, be game-changing for Skillz, as the company could blaze a trail in cloud gaming. Yet, Paradise didn't seem overly enthusiastic about this opportunity in the conference call. Indeed, he uncharacteristically played it safe, cautioning that his company's cloud gaming effort is in private beta testing on three games, so evidently it's "really still early to be talking about user behavior."
Maybe it is too early for that, but Paradise should at least throw the downtrodden investors a bone here. If Paradise doesn't seem overly enthused about the company's foray into cloud-based gaming, why should other stakeholders care about it?
Time to chill on Skillz
Skillz' future could be in cloud gaming, but investors should see the company pursue it aggressively and enthusiastically. Even that wouldn't be enough as Skillz would also need to prove cloud-based gaming can substantially help it advance on its path to profitability.
Speaking of which, Paradise can harp on the "transition to profitable growth" theme, but as they say, the numbers don't lie. Until Skillz actually steers in the direction of profitability -- not to mention, actually getting there -- investors should seek gaming-market gains elsewhere.