Skillz (SKLZ 8.48%) reported 2022 second-quarter financial results early in August that revealed a significant milestone. It finally lowered sales and marketing expenses to less than 100% of revenue.
As the Federal Reserve started raising interest rates, it increased the cost of capital for businesses. Investors became less interested in companies like Skillz, which generated massive losses on the bottom line. Skillz's increasing focus on profitability is good news for shareholders, but is it enough to make investors buy the stock now?
Skillz reduces sales and marketing spending to below 100% of revenue
In its most recent quarter, which ended on June 30, Skillz's revenue totaled $73.3 million. In that same time, Skillz spent $73.2 million in sales and marketing. That's the first time in several quarters that Skillz's revenue surpassed spending on sales and marketing, albeit by a slight margin. Still, the proportional decrease in sales and marketing spending hurt meaningfully. Skillz's revenue of $73 million in Q2 was $16.2 million lower than the $89.5 million reported in that same quarter last year. Further, paying monthly active users fell to 420,000 in Q2 from 460,000 last year.
Skillz is a gaming platform that lets users wager on the game's outcome. But because the games on the platform are based on skill, it is not regulated like a gambling company, giving it market access advantages. The company outsources the development of games on the platform, and gives developers a percentage of the revenue their creations generate.
Another way Skillz tries to attract developers is by having a large base of customers. Of course, more players equals a higher potential revenue for developers who will be eager to jump at the opportunity. This can partly explain why Skillz is spending so aggressively on sales and marketing to attract players. However, the tepid results from the large marketing budget have some investors asking if management could better use those funds elsewhere to drive growth (the stock is down 96% off its highs).
For instance, could it be better to divert a portion of the spending to develop games in-house? Skillz has data on what type of games its players are attracted to, so in theory, it could successfully develop at least some of the games on the platform rather than outsourcing 100% of the critical part of its business.
Too early to buy Skillz stock
While it's encouraging that management is actively lowering the sales and marketing budget, which had arguably been too high for far too long, it will take time to observe the ultimate impact of these changes. Investors will finally see what number of its customers are organic and what parts were supported by incentives. For example, I am the worst type of customer for DoorDash. I rarely order from them unless they offer me a massive promotion like $20 off an order of $20 or more. DoorDash might count me as a customer, but I will bail once the promotions end.
Skillz likely has plenty of customers like myself, as evident by the fall in its paying monthly active users that coincided with the decrease in marketing spending. The risks for investing in Skillz are high without it knowing how many users it will retain when it reduces incentives. Therefore, investors should wait a few quarters before considering investing in Skillz stock.