The Nasdaq’s steep correction in the last month is punitive to the most speculative stocks in the last two years. This resulted in Skillz (NYSE:SKLZ) being stuck in a sustained downtrend. Investors are no longer willing to wait for an electronic gaming and multimedia firm to pivot to the sports betting market. SKLZ stock is especially unattractive because it is not a dominant player in the waning gaming market.
Shareholders who bought Skillz in the last year are likely underwater.
The risks of the company under-performing are growing. And the rewards for sticking around are not terribly attractive.
Let’s take a closer look at some of the things SKLZ stock has going against it and a few things it has in its favor.
Outlook Dims for SKLZ Stock
Skillz relies on its deep relationship with game developers. Great game development attracts an audience, which leads to revenue for everyone. Yet developers will not benefit from the revenue share model in the early phases. They need to gain familiarity with the Skillz software development kit first. Monetization only happens for the company when the conversion rate from user to paying customer increases.
In the last quarter, Chief Executive Officer Andrew Paradise said that the company saw a payer conversion rate of 17%. This is higher than the industry average, where in-app purchasing is around 2%. Still, the economy may start slowing as the Federal Reserve raises interest rates to lower inflation. Revenue may slow in the quarters ahead.
Investors are bracing for a slowdown at Skillz. At current levels, the stock still has downside valuation risks. Shares trade at a price-to-sales (P/S) in the four times range. When Microsoft (NASDAQ:MSFT) bought Activision (NASDAQ:ATVI), ATVI stock rose to a P/S of around seven times. Markets do not expect anyone will offer to buy Skillz.
Sports Gaming is Unattractive
Skillz attracted speculators in the last two years, who bet that the company would offer sports betting-like games. Fortunately, for these speculators, Skillz hosts tournaments or head-to-head format games. But if you look at the list of states where Skillz games are not currently available, the addressable market shrinks. For example, Skillz games are not available in Florida (the 3rd largest state by population), Tennessee (16th largest population), Delaware and Connecticut.
Skillz offers time-based leagues. Sprinter cup offers players offline gaming and a chance to win a prize. For the current quarter, CEO Andrew Paradise may announce the benefits of its partnership with the National Football League (winners shown here). The NFL and Skillz announced the game developer challenge almost a year ago.
Investors should temper their expectations for the sports-betting market. DraftKings (NASDAQ:DKNG) is a sports betting leader. DKNG stock fell steadily since Sept. 2021. The analyst highlight on SKLZ shares recently is the only news headline lifting DraftKings shares.
To offset its risks in the sports market, Skillz has notable game releases. Big Buck Hunter is a mobile game in a continuous improvement loop. It will collect plenty of user feedback that involves the developer partner. Through an iterative redesign development, the game will get better. This should attract more players to download the title.
Trivia Crack, which involved 450 people from Argentine game company etermax, is a successful franchise. The soft launch of Trivia Crack Payday in the third quarter is still in the early phases. Skillz might post positive figures when it reports quarterly results. Look for cost per install (or CPI) falling as it scales the game title.
A Fair Value for Skillz Stock
Readers may apply a 5-year discounted cash flow earnings before interest, taxes, depreciation, and amortization (EBITDA) model to estimate the fair value of Skillz stock. Assume a generous EBITDA multiple of 15 times. From the metrics below, the stock has a fair value of around $4.00:
| Metrics | Range | Conclusion |
| Discount Rate | 10.3% – 9.3% | 9.80% |
| Terminal EBITDA Multiple | 14.0x – 16.0x | 15.0x |
| Fair Value | $3.76 – $4.21 | $3.98 |
On Wall Street, analysts are more bullish. The average price target is $15, according to Tipranks.
Risks
In Dec. 2021, Skillz issued a big $300 million senior secured notes offering. This will add debt to the company’s balance sheet. If it uses the funds to overpay for strategic opportunities, it will hurt shareholders. Investors may assume that Skillz will invest the funds in a disciplined manner. By doing so, the future acquisition will strengthen its moat and foster customer growth.
In 2022, Skillz may expand into games and new genres that fail to attract more players. This would hurt the stock price further.
The Takeaway for SKLZ Stock
Investors now care about the bottom line for technology companies. Skillz cannot rely on impressive monthly active user figures to imply future growth. It needs to post operating profits and forecast margin expansion for 2022. If management fails to do so, investors will look elsewhere in the mobile gaming sector.
The partnership with NFL is a bright spot for Skillz. For 2022, expect meaningful products resulting from the NFL competition. Combined with an aggressive promotion during the 2022 NFL season, Skillz could have a hit game supported by NFL branding.
For now though SKLZ stock is a very risky speculative play.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.