What happened

Shares of Skillz (SKLZ 7.45%) tanked 23.3% in September, according to data from S&P Global Market Intelligence. The mobile games and competition company continues to get hit by a lack of execution and rising interest rates from the Federal Reserve. As of Oct. 4, the stock is now down 88% since its debut in 2020. 

So what

Skillz is a mobile games company that focuses on building competitive multiplayer environments. Its mobile app reportedly offers users hundreds of live events where they can compete with other people around the world and win real money. This was a promising and potentially innovative business model, which got investors excited about Skillz stock in 2020. At one point, shares of the company were up over 300% in less than a year.

SKLZ Revenue (Quarterly YoY Growth) Chart

SKLZ Revenue (Quarterly YoY Growth) data by YCharts

The problem is, while competitive mobile games were a promising idea, Skillz has seen a huge lack of execution over the past few quarters. In Q2, revenue declined 22% quarter over quarter to $73 million, and top-line year-over-year growth numbers have turned negative as well. The company is hemorrhaging money, with a negative free cash flow of $145 million through the first six months of this year on only $166.7 million of revenue.

With rising interest rates, investors are getting pessimistic about unprofitable companies due to how expensive financing loans will be in the coming years. This combination of unprofitability and declining revenue is a recipe for disaster. It is no surprise then to see investors continue to sell down Skillz stock in 2022. If the company continues to see revenue declines, I wouldn't be surprised if the stock falls even further from here. 

Now what

It should be clear by now that Skillz is running an unsustainable business and needs a huge turnaround for the stock to do well for investors. To illustrate my point, let's look at the efficiency (or lack thereof) of its sales and marketing expenses. Through the first half of 2022, Skillz spent $190.5 million on marketing, or more than 100% of its revenue. And yet, its revenue declined year over year. If the company ever stopped this marketing to try to get profitable, revenue would likely decline precipitously, making it impossible for the company to generate a profit.

This inefficient marketing spend puts Skillz in a very difficult position, and the company will have to make a huge turnaround if it is going to start generating a profit. Avoid buying the dip on Skillz stock unless this changes.