ContextLogic (WISH 1.40%), the e-commerce company better known as Wish, and Skillz (SKLZ -2.09%), the gaming platform company that merged with a special purpose acquisition company (SPAC) in late 2020, both burned plenty of investors over the past year. Wish went public at $24 per share in December 2020, and Skillz opened at $17.89 on its first trading day that same month. However, both stocks now trade at about $2 a share.
Many investors have clearly given up on Wish and Skillz, but both stocks look fundamentally cheap at these levels. Wish trades at less than one time its estimated sales this year, while Skillz trades at about two times this year's sales. They're both cheap for obvious reasons -- but could one of these stocks be a better turnaround play for daring value investors?
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Why did Wish's stock collapse?
Wish is a discount online marketplace that mainly enables Chinese merchants to sell their products to overseas buyers. It served more than 100 million monthly active users (MAUs) globally at the time of its initial public offering (IPO), but that number had dwindled to just 27 million in its latest quarter.
Wish's user base shrank for three reasons. First, it offered plenty of cheap products, but its ongoing quality control and shipping issues -- which were rooted in its dependence on Chinese sellers -- alienated many of its customers. Second, it was repeatedly accused of selling fake, counterfeit, and dangerous products. Citing those issues, France banned Wish last year and ordered its removal from the country's app stores and search engines.
Lastly, Wish reined in its marketing expenses over the past year, but that lower ad spending reduced the brand's visibility and eroded its defenses against larger e-commerce marketplaces like Amazon.
Wish's revenue rose 34% in 2020 as consumers purchased more products online during the pandemic. But in 2021, its revenue fell 18% to $2.09 billion as those tailwinds faded away, and it grappled with its loss of MAUs.
Wish believes it can improve its marketplace by rewarding higher-quality merchants with subsidies, expanding its own logistics network, and rolling out new features like integrated videos.
Those new initiatives could require a lot of capital. However, Wish's net loss still narrowed year over year from $745 million to $361 million in 2021 as its new CEO, Vijay Talwar, focused on temporarily reducing its marketing expenses to free up more cash for those internal improvements.
Analysts expect Wish's revenue to decline another 48% to $1.08 billion this year as it posts a narrower net loss. Its cash and equivalents declined 49% to $1.01 billion at the end of 2021, but its low debt-to-equity ratio of 0.6 indicates it can still take on more leverage to fix its struggling business.
Why did Skillz's stock crash?
Skillz's gaming platform hosts multiplayer matches and real-money tournaments for mobile games, but it doesn't publish any games of its own. Instead of creating those multiplayer features from scratch (which can be time-consuming and difficult to scale), developers can simply outsource them to Skillz with a few lines of code. In exchange, Skillz keeps half of the revenues generated from competitions on its platform.
This approach sounds disruptive, but three glaring problems surfaced after Skillz's public debut. First, it generated more than 70% of its revenues over the past three years from just three games from two developers: Tether's Solitaire Cube and 21 Blitz, and Big Run Studios' Blackout Bingo.
That customer concentration, along with its tiny audience of about half a million paid users, indicated its SPAC backer, Flying Eagle Acquisition Corp., might have exaggerated its disruptive growth potential.
Second, Skillz's growth decelerated as its losses widened. In 2021, its revenue rose 67% to $384.1 million, but its net loss widened from $145.5 million to $181.4 million. The company's inability to narrow its losses, even after retaining a 50% cut of its clients' gaming revenues, indicated the costs of hosting those game sessions were unsustainable.
Lastly, Skillz only expects its revenue to rise 4% to $400 million this year. Like Wish, it attributes that slowdown to an intentional reduction of its marketing expenses. It also believes its acquisition of the mobile marketing platform Aarki last year will eventually enable it to reach more potential customers without significantly increasing its spending on third-party ads.
That's a logical strategy, but it won't address pressing Skillz's customer concentration issues or the apparent slowdown of those top games. Skillz's cash and equivalents plunged 81% year over year to $114.6 million in the first quarter, but its debt-to-equity ratio of 0.7 still gives it some room to take on more debt to fund its turnaround efforts -- which include striking new partnerships and launching additional features for other game genres.
The better value play: Wish
I wouldn't buy either of these wobbly stocks in this challenging market right now, since plenty of other high-quality stocks are currently on sale. But if I had to pick one over the other as a value play, I'd reluctantly bet on Wish because its stock is cheaper, its balance sheet is stronger, and it doesn't need to deal with any major customer concentration issues.
