Empty SKLZ stock before a major correction hits you in your profits
Investors were already selling Skillz (NYSE:SKLZ) before the company publishes its quarterly results on August 3.
After the report, SKLZ’s stock collapsed again. Obviously, there is something the market doesn’t like about this gaming and multimedia company.
At these levels, investors might think the stock is less risky and more rewarding, but let’s take a closer look at this earnings report and see if there is still hope for SKLZ stock.
In the second trimester, Skillz posted a 21 cents loss under GAAP. It missed analyst consensus estimates by 12 cents. Revenue increased 52% year-over-year to $ 89.5 million. Gross market volume increased 47% to $ 608.5 million.
The high GMV figure is impressive, supporting the strong gross margin of $ 85.1 million.
Going forward, profits will increase as the company issues a development challenge for a new mobile game with the National Football League brand.
During the quarter, Skillz received hundreds of submissions and selected 14 semi-finalists. The competition is now in the development phase.
Growth opportunity and SKLZ actions
Revenue Director Casey Chafkin expects the conversion rate from playing members to paying members to increase.
He said the the conference call that the company has looked at market research and researched the business since its inception. Skillz aims to increase conversion to over 40% or more.
Aarki is a demand side platform (DSP) with more than five trillion monthly ad auctions. Skillz announced earlier this summer that he had acquired the company. The overriding hope is that Aarki will complete Skillz’s footprint in the gaming industry.
Aarki has a machine learning algorithm that ensures a high return on investment for advertisers. Skillz will supplement this algorithm with its data to improve marketing on the platform.
Skillz CEO Andrew Paradise said that Aarki will add $ 13 million in revenue for the rest of 2021, excluding synergies.
In addition to this acquisition, Skillz has formed a strategic partnership with Exit Games. Exit is the developer of Photon, a synchronous multiplayer gaming technology.
He invested in Exit Games to gain permanent access to Exit technology to “exclusively power its tournaments and esports platform”.
This will expand eGames titles as publishers will have new genres to build games on. For example, having a game like Battle Royale would dramatically increase Skillz’s addressable market.
As the exclusive platform for Exit’s technology, Skillz becomes the preferred partner for publishers and developers around the world. It can monetize the multiplayer synchronous technology offered by Exit.
Wall Street analysts who cover Skillz are still bullish on his outlook. The average price target among five analysts is $ 19, according to Tipranks.
In a five-year discounted cash flow growth output model, readers can predict the stock’s fair value. Assume a perpetual growth rate of 6.0%. This would imply a fair value of around $ 12 per share:
|Discount rate||9.5% – 8.0%||9.00%|
|Growth rate in perpetuity||5.5% – 6.5%||6.00%|
|Just value||$ 9.57 – $ 23.38||$ 12.30|
Readers can increase the model’s growth rate if they are confident Skillz will show better increases in revenue over the next four years. Conversely, a lower growth rate would lower the fair value.
Beware of the risks
Skillz may provide investors with exposure to the competitive gaming market, but the industry is fiercely competitive.
The company might not grow its user base as expected, which will hurt its revenue potential. Investors may prefer a larger player with more compelling valuations.
For example, Zynga (NASDAQ:ZNGA) manufactures mobile games and is rated at 3.7 times the price / sell ratio. SKLZ stock is trading at 15.8 times the P / S. Zynga grows the business through major acquisitions.
Yet in the last trimestre, he displayed “the softness in our reservations”. While declining user interest in mobile gaming is a trend, usage of Skillz’s mobile eSports offering may also weaken.
The deployment of the vaccine around the world is slowing the spread of Covid-19. This can cause players to go out to public places instead of playing. Declining user base would hurt Skillz’s monetization plans and put pressure on operating profits.
Your takeaway meals from the SKLZ stock
Aside from Reddit’s WallStreetBets which recently bought Skillz shares, the market is bearish on Skillz. The short float is around 20%.
The stock is at its lowest for 52 weeks and shows no signs of an uptrend. The title tried but failed to recover twice in July. Looking back, optimism for the company peaked in February when the stock traded at $ 46.30.
If Skillz picks up, shareholders who bought the shares at higher prices will rush to sell to break even. This limits the rise until the selling pressure is over. Also, the Nasdaq is showing signs of fatigue. There has been no correction for months. If the market decides that the tech index needs to undergo a correction, Skillz could continue to fall.
As of the publication date, Chris Lau does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Chris Lau is a contributing author for InvestorPlace.com and many other financial sites. Chris has over 20 years of experience investing in the stock market and leads the Do-It-Yourself Value Market on Seeking Alpha. He shares his stock picks so readers get original information that helps improve returns on investment.