P Penny Stocks

SKLZ Stock: Duelin’ Again Rulin’ Again

August 24, 2022

Following a less than ideal earnings call on August 3rd, Skillz Inc. (NYSE: SKLZ) stock has dropped further – dissuading some investors of the stock’s potential. In reality, SKLZ stock has been declining since November 2021 despite rallying at $3.70 in March. Now down over 90% from its 52 week high of $13.98 , the company is undergoing a period of significant changes as it grapples with fraudulent users, poor product development, and changes to support its lifetime value. Aiming to reduce the costs related to customer acquisition, SKLZ plans to breakeven by 2024 but must first prove that it is able to draw in customers mainly on the merit of its games. If successful, these improvements could signify a turnaround for SKLZ stock over the long-term.

*Written August 24th, 2021

SKLZ stock game

As an electronic gaming company, Skillz’s profitability and company structure is highly dependent on its user engagement. However, Skillz mainly offers single-player games similar to classic arcade games like Solitaire and 21 Blitz. While users compete in these mobile game competitions, the app does not support multiplayer games which typically attract more users thanks to their format. Therefore, customer acquisition costs are an essential part of SKLZ’s budget planning. However, for the six month period ending June 30th the number of total monthly active users (MAU) dropped to 2.5 million from 2.6 million in 2020 which may explain the stock’s decreased popularity.

SKLZ Stock Earnings Call

The company’s CEO, Andrew Paradise, referenced a “covid bump” that has affected its comparative growth saying, “we’re definitely seeing elevated CPIs in Q2. And so we’ve been making quite a number of mid- and long-term investments” to mitigate them. For this reason, the company chose to reduce their user acquisition spending which had increased during Q1. In the earnings call, Paradise explained that while the company is optimizing its resources for engagement marketing and user acquisition, its focus is on user acquisition “but we’ll continue to exercise discipline in a high UAC (user acquisition cost) environment.”

Considering that SKLZ’s Q2 is typically adjusted due to seasonal pressures and that consumer acquisition costs (CAC) is volatile depending on the quarter, this news is far from a death sentence. But its Q2 2021 Net Loss was concerning given the $59.4 million increase from Q2 2020. However, this increase can be partly explained by the company’s redemption of $29.6 million in public warrants during Q2, leaving SKLZ with $692.8 million in cash and no debt. Now, SKLZ is in a good position to address some underlying issues, such as its monthly active users (MAU) and paying monthly active users (PMAU).

The company has explicitly specified that it sees monetizing non-paying users as a future opportunity because their current business model generates all its revenue from currently paying users. It appears that this model is working well for the company as its Payor Conversion rate increased 7% from the prior year and 2% from the previous quarter. This contributed to a 52% year over year revenue growth thanks to its corresponding 53% growth in PMAU. Yet – as of Q2 – 81% of SKLZ’ MAU were not payors. By focusing on scaling paying MAUs rather than general MAUs, SKLZ could be sacrificing an opportunity to establish itself as a consumer entertainment brand and capitalize on its first mover advantage.

SKLZ Stock Catalysts

Anticipating this issue, SKLZ has plans to acquire Aarki – a marketing demand-side platform with a background in the mobile gaming industry – for $150 million in cash and stock in Q3 2021. Aarki is a mobile marketing platform which uses machine learning and big data to “predict the likelihood that a new user will convert, engage, or make purchases within the app”. Given this acquisition, the heralded Ark Investment Management – led by Cathie Wood – purchased 22.66 million shares of SKLZ stock in June. Using this technology, SKLZ can monetize non-payors by selling their impressions to advertisers, thereby reducing CAC (consumer acquisition costs) over time.

However, its PMAU has dropped from 467 thousand in Q1 to 460 thousand in Q2 which may suggest a flattening MAU trend. This current trajectory may change once SKLZ expands its audience beyond the USA. Considering the product’s global applicability, the company’s decision to launch in India later this year is well-timed. CEO Paradise explained his decision pointing out that “the international mobile gaming market is 4x larger than North America, but it currently represents less than 10%” of the company’s revenue. Based on the expectation that their addressable market will expand 65% and grow 4x faster than the United States, the company’s expansion plans could have great potential.

SKLZ Stock News

This paired with the CEO’s long-term blueprint for entering education and fitness markets are bullish signs for investors hopeful that SKLZ stock will rally. To achieve these goals the company is relying on several key performance indicators such as engagement, retention, conversion, and monetization. Because the company’s repertoire of games are relatively simple and lack synchronous player capability, SKLZ has made a strategic partnership with Exit Games – known for its work with Sega, Square Enix, Ubisoft, Oculus and Bandai Namco.

This partnership is integral to achieving SKLZ’s KPI goals because developers can build battle royale style games using Exit’s game engine. Taking SKLZ stock to the next level with competitive, real-time gameplay, Exit Games’ multiplayer servers will help SKLZ retain and engage users who could later become PMAUs. In exchange, Skillz has made a worthwhile $50 million strategic investment in the company.

NFL Mobile Game

In the same vein, Skillz has made progress on its multi-year gaming agreement from April. The deal secured the company’s right to power a NFL-themed mobile game – a noteworthy addition to its collection of mobile esport games. Jointly hosting the global game developer challenge, Skillz and the NFL have whittled contestants down to 14 semi finalists who are currently developing their mobile games. The final game(s) will be launched and promoted in tandem with the 2022 NFL season, offering an incredible branding opportunity for SKLZ to expand upon its esports niche.

SKLZ Stock Forecast

At this point, Skillz seems to be doing everything right. Carefully lining up marketing opportunities and expanding its gaming capabilities will no doubt sustain its fundamental growth. Its business model appears to be successful thanks to AI-personalization which has made a noticeable difference in retaining and monetizing users. For the first half of 2021, SKLZ has increased the revenue generated per user by 72% which will likely continue throughout the year and as its MAU increases. If SKLZ is successful in retaining this growth and upscaling with its strategic partnerships, a rally seems likely.

Currently there are rumors of a potential takeover fueled by three industry sources which reported that Skillz is one potential target of a merger or acquisition. If this is the case, SKILLZ holds promise as not only a long-term investment opportunity, but also a short term play contingent upon a buyout. Given SKLZ’s established place in mobile esports, it offers many assets as a merger candidate which would be difficult to replicate elsewhere. If a merger or acquisition is finalized, SKLZ target stock price could be higher.

Technical Analysis

SKLZ stock saw a notable sell off following its earnings call and has trended downward since. Its support is near 10.48 with an underlying support of 10.10. Its resistance is near 12.08 with a secondary level near 12.63. With its RSI at 63, the stock is climbing. Similarly, its MACD is moving upwards with no sign of convergence. Accumulation has been trending down since July 20th but started turning around on the 23rd. The stock has been gaining ground following a positive market opening on the 20th and seems set to continue.

SKLZ Stock Price

SKLZ stock price today could fall lower than its current value of $11.03 and likely will not rebound to SKLZ stock price of June and July for some time. But SKLZ stock has seen similar dips to the $13 price mark in May and April. While SKLZ stock has now dipped lower and over a more extended period of time, the company’s structure and substantial plans for expansion are cause for investor confidence. In light of its low price point, SKLZ stock may prove to be a worthwhile investment.

*Updated August 24th, 2022

Despite our optimism last August, SKLZ stock has continued trending down after reaching a high of $13.98 in September 2021. Now SKLZ stock price is $___ – up roughly 35% from its all time low. So why is SKLZ stock dropping?

Why is SKLZ Stock Dropping?

One of the reasons SKLZ stock has continued to fall is its management’s failure to rectify many of the company’s underlying issues. In the company’s Q2 earnings call, SKLZ’s CEO elaborated on issues such as product development and players cheating the platform’s system. The tone of this earnings call was much less upbeat than its Q1 call and for good reason.

SKLZ is currently on a path to transform its business which was deeply impacted by the COVID-19 pandemic. The company IPO’ed in April of 2020 and the unexpected shift to remote work was difficult for the company. Scaling from 190 people to 750 over the last 2 years, SKLZ experienced underperformance in a variety of roles which impacted the company’s overall productivity. Now shifting back to in-person collaboration, SKLZ believes that improvements in teamwork will enhance its analysis of new products and future rollouts as they are brought to market.

Its decision to resume in-person work will help drive productivity and while the turnover it’s experiencing to bring the right people in for these positions is unfortunate, in the long-run it will improve its functions. This will also put SKLZ in a better position to achieve its goals of focusing on profitable growth, improving efficiency, and driving player and developer experience through product-led initiatives.

SKLZ Stock Earnings Call

Due to this period of disruption, SKLZ was forced to lower its full year 2022 revenue guidance from $400 million to $275 million. This drop is a result of the user retention trends on SKLZ platform and the slower pace of its product development.

Another issue addressed this quarter was fraud. While fraud and cheating of the system were not brought up in the Q1 call, it appears that SKLZ’s management has become aware of this issue as players in other countries abuse its system discounts and incentives. For example, in the Philippines SKLZ has seen users abuse its friend referral program without delivering real user referrals. This means, bad actors are being rewarded with financial incentives without SKLZ benefiting from its marketing.

For this reason, SKLZ will be removing some of these incentives which will result in a loss of paying MAU. However, the company believes that this move will be beneficial for the long-term health of the company since these users are in reality a smaller number of people who are already depositing low amounts of money or playing with system incentives. The company believes that as these incentives disappear it will contribute to a decline in paying monthly active users on the site.

But after removing these users and making other instrumental changes to its operations, SKLZ will become more profitable on a user-by-user level across its business. Once new cohorts of users are brought in, this will also drive additional user growth without reflecting the low or no value users as part of its paying MAU. On top of that, SKLZ has built out an identity team that is using industry standard tools such as 2-factor SMS authentication to verify users identities and cut back on fraudulent accounts.

Could SKLZ Stock Turnaround?

While fraudulent users are a big concern for any user-based company, SKLZ is dealing with far more than just that. The company’s management cited that lower retention for some of its mature user cohorts was the primary cause of its sequential decline in revenue which points to an even bigger issue for the company.

Critics have pointed out that SKLZ’s games were intended to attract players on their own merit. However, the company has invested heavily in marketing to players – driving its customer acquisition costs higher. These rising expenses and dipping revenues have so far led to the downward spiral of SKLZ stock price.

Management

Although this may paint a gloomy SKLZ stock forecast, there is a silver lining. In October, the company brought Vatsal Bhardwaj on as its Chief Product Officer. Bhardwaj served as the General Manager and Director of Game Tech for Amazon Web Services and before that he served as Head of Product for various groups at Facebook.

In his new role, Bhardwaj will help SKLZ develop new gameplay technologies and move the platform towards multiplayer synchronous gaming while building out brand-sponsored tournaments and partnerships. The former Blackstone Executive – Jason Roswig – has also joined SKLZ as its new President and CFO.

With these new additions to SKLZ’s management, the company is working to improve user acquisition efficiency and reduce low-return engagement marketing initiatives as it works towards profitability. According to the plan laid out in Q1, SKLZ had planned to end the year with its YoY revenue after engagement marketing growth rate above 30%, this would be the first step towards the business reaching breakeven by the end of 2024.

While this plan created some optimism for SKLZ stock price, the company seems to have encountered more issues than it anticipated when first outlining its plans. So far, revenue after engagement marketing and paying MAUs have all fallen sequentially quarter-over-quarter. Although the company managed to reduce its net loss by almost $90 million in Q2.

SKLZ Stock & Lifetime Value

Another issue affecting the performance of SKLZ stock has been the company’s struggles with the lifetime value of some of its products. Recently, the company has begun reverting and removing experiments and product features which were rolled out without rigorous analysis of the data.

Now, any program that has seen a decay in lifetime value is being re-evaluated to verify whether it was an appropriate change to the company’s products. Removing these features has already shown improvements in lifetime value but unfortunately this means that SKLZ is paying to undo work that it had paid to have done previously.

Despite this, SKLZ is working to improve its lifetime value and return it to its pre-IPO levels. While these changes alone will increase the company’s lifetime value, SKLZ believes that developing its leagues and investing in social features will also improve its value over time.

In addition to that, SKLZ is reducing its customer acquisition cost which has already improved to its best level since the beginning of the pandemic. SKLZ believes that this cost can be driven even lower through app store optimization and by investing in organic channel development as well as media optimization. Cutting back inefficient user acquisition programs was an important step for the company which in the past has invested heavily in this area.

SKLZ Stock Catalysts

On that note, SKLZ may be able to attract new users through the launch of its NFL game which will coincide with the start of the 2022 NFL season set to begin in September. This could be an important catalyst for the stock since both parties have agreed to cross promote the game during the season – potentially bringing new users to SKLZ’s platform.

SKLZ also has a multi-year partnership with the UFC for a mixed martial arts branded mobile game. Since MMA fighting is one of the fastest-rising sports globally, this deal could help attract a new audience of gamers to SKLZ’s platform.

Games

While both of these deals are promising catalysts for SKLZ stock, the company is still faced with underlying issues related to the quality of games on its mobile platform. The fact that SKLZ has seen slower product development and many of its product features do not improve lifetime value could be a sign that the company is struggling to add new and better games to its platform.

In the past, SKLZ has generated the majority of its revenue from only a few games. Last year Solitaire Cube, 21 Blitz, and Blackout Bingo accounted for 72% of the company’s revenue. This signifies that the company is struggling to develop new games that are able to attract and retain users.

Cloud-Based Gaming

Considering that the company has been in a period of restructuring as it optimizes around market spend, these issues could be alleviated once it’s able to launch games using its cloud-based gaming product. In Q1 the company was beta testing three games on its cloud gaming product which would introduce the platform to computer users through web games. Cloud-based gaming offers other opportunities to grow the platform since sharing between Android users can be done by sending a single text link to launch the game. This could help SKLZ games go viral since onboarding for new users would be much smoother.

In Q1, SKLZ also discussed opportunities to grow in the Android market through cloud based gaming. Seeing this as both a domestic and global opportunity, the company’s CEO elaborated that Android phones currently make up at least 70% of the global market. Some of the world’s most highly-populated countries are dominated by Android phones and gaining access to these high-growth markets will be an important step forward for SKLZ.

With this in mind SKLZ entered the Indian gaming markets with Diamond Strike – a Skillz-owned and operated game and platform – at the start of this year. SKLZ has been working towards expansion outside of the US and the Indian mobile gaming market is a prime target since it is expected to reach $5 billion by 2025.

SKLZ Stock Analyst Ratings

Since last August SKLZ stock price has fallen 88% which has affected analysts’ ratings for the stock as a result. According to the Wall Street Journal, analysts’ have an average price target of $2.08 for SKLZ stock with analysts ranging from $3.75 on the high end and $1.50 on the low end.

Analysts have been revising their price targets for SKLZ stock for some time and after its Q2 GAAP EPS loss beat expectations by one cent with a revenue miss of $19.43 million, price targets have been downgraded again.

Canaccord Genuity lowered its price target from $5 to $1.50 per share while Citi gave SKLZ stock a neutral rating and $1.55 price target on account of the 26% drop in paying monthly active users. Meanwhile, Jeffries has given SKLZ stock a price target of $2 based on the company’s reduction in spending resulting in a decline in users and monetization.

Overall, these price targets for SKLZ stock reflect the stock’s downward trajectory as well as the troubles SKLZ is experiencing operationally. While this does not mean that the company cannot show renewed signs of sustainable growth as it reduces its user acquisition and engagement marketing spend, it does mean that SKLZ stock will face an upwards battle in the short term.

SKLZ Stock Short Data

On that note, SKLZ stock could be a short squeeze candidate given the bearish sentiment surrounding it.

Short interest is currently 18% of the free float
There are 54.29 million shares on loan

While the cost to borrow and utilization are not very high, its worth noting that SKLZ stock has a relatively low float of 288 million. If its short interest were to increase, SKLZ stock could catch on as a short squeeze candidate. But as of now, it does not appear to be in a good position to rally based on its short data.

If you’re interested in finding the next short squeeze stocks, read our guide to learn more.

SKLZ Stock Financials

Despite its restructuring efforts, SKLZ brought in $73 million in revenue which is equivalent to its spending on sales and marketing for the quarter. This was also a drop in revenue from the $93.4 million generated in Q1 when the company spent $117 million on sales and marketing. The company’s net loss has also increased 56% for H1 compared the same year ago period.

However, SKLZ has total current assets amounting to $502 million, of which $169.9 million is cash and cash equivalents. Its loss from operations also decreased from $144 million in Q1 to $54 million in Q2. A silver lining for the company is its $590 million in cash, cash equivalents, and marketable securities as well as $300 million of debt outstanding. This could put SKLZ in the financial position to pursue its goals and continue restructuring.

Technical Analysis

The current SKLZ stock price is $1.52. After touching its support at 1.45 the penny stock saw strong demand forming a green candle on the 1 hour chart. SKLZ stock recently rallied hitting its resistance at 2.12 which is now an important level to watch.

Whereas at the end of June, SKLZ stock formed its 52-week low of $1.15. Since then it has rallied indicating that at this price level the stock has strong demand. As is, the stock has declined 29% after gaining roughly 36% following its earnings. If SKLZ stock is able to maintain its support at 1.45 that would be a bullish sign, but if it breaks past this level the next clear support is at 1.29 and 1.20. The MAs are also drawing closer for a death cross which could signal a new downwards trend.

Looking at the indicators its clear that SKLZ stock is rebounding after becoming oversold. Currently the RSI is near 37 which is still in the oversold territory. Accumulation is also starting to decline following its rally on earnings. The MACD is now bullish to the downside.