When Skillz (NYSE:SKLZ) announced a senior notes offering on Dec. 16, the company’s timing could not have been worse. SKLZ stock traded close to a 52-week low and below the key 20- and 50-day simple moving average.
With investors losing money on their position, Skillz is on the offensive. It needs the $300 million for general corporate purposes or future acquisitions of “other companies, products or technologies.”
Serious Risks with SKLZ Stock
The senior notes will cost Skillz an interest rate of 10.25%. This is a red flag. The leading mobile game platform business does not make enough sales to offset costs.
In the third quarter of 2021, Skillz reported revenue growing by 70% year-over-year to $102.1 million. The firm reported a net income of $50.8 million. This is due primarily to the $113.6 million in income related to a drop in the estimated fair value of its private common stock warrants.
On an adjusted EBITDA basis, Skillz lost $41.7 million.
Fast Company gave Skillz a Top 50 ranking of its 2021 list of best workplaces for innovators. The glamour title will not soothe investors. Skillz added $300 million in debt. It may spend the funds inefficiently on advertising. Skillz will waste resources on marketing for other companies that happen to use a Skillz product.
Skillz ended the third quarter with $540.3 million and no debt. The cash raised is unnecessary. It should worry investors. Besides spending more than it makes, the firm may overpay for an acquisition. Integrating another business to fuel growth will have risks. It may lack the expertise to leverage the acquired technology.
Aarki Acquisition
In June, Skillz announced its plan to buy San Francisco-based Aarki to form an integrated esports advertising platform.
Chief Executive Officer Andrew Paradise said that Aarki, a demand-side platform, will give Skillz more valuable data. Aarki participated in five trillion advertising auctions monthly when Skillz announced the acquisition. It will use the ad impression data to better understand user purchasing behavior.
Paradise believes the company will more efficiently manage its game launch process. It will have performance data to measure soft launches. It may analyze the data to improve user engagement and increase retention.
Opportunity
Trivia Crack is the No. 1 trivia game in the world with 40 million monthly active users. Skillz will offer a live tournament-style play on its platform. Speculators are not so bullish on mobile gaming firms based on active user count only. The stock tried to rally in the latter half of 2020 only to trend lower.
Skillz must add games like Trivia Crack to its ecosystem as it aims to get billions of monthly average users to participate. It always focused on getting paying users. That way, the developer community will appreciate the value proposition of the platform. This approach is not without risk. Skillz may ask for payment too early in the process.
In the advertising technology platform segment, Aarki will add meaningfully to the Skillz user base. Aarki has machine learning algorithms on its platform. Skillz will first integrate it, find efficiencies, and realize synergies from this acquisition. Paradise lowered investor expectations at the digital gaming summit. He said that efficiencies from the data value chain would take a few more quarters.
Fair Value of SKLZ Stock
Wall Street analysts have a price target ranging from $12 to $25, according to Tipranks. At an average price target of $18.60, investors should not assume analysts have a high conviction on the implied 150% upside. Most analysts set the price target two months ago or longer.
Skillz scores poorly on value. The low score is due to an unfavorably high relative price-to-sales multiple of 8x. The EV/EBITDA is negative, compared to a positive value in the industry and the S&P 500 index.
Too Many Promises
Momentum investors gave up on Skillz in recent weeks. They sold the stock to realize losses to offset gains in other holdings. Skillz is investing too heavily to chase growth, creating quarterly losses. Still, the firm has strong MAUs. After boosting its data collection on customer behavior, Skillz must deliver on the promise of sustained profit growth.
Investors should watch out for signs that the video game tournament is not losing momentum. A slowdown would hurt SKLZ stock the more investors lose patience waiting for results.
Fortunately, gaming on the smartphone is only growing. People may want to play competitive games on the device. Should they gamble by having money on the line, the stock might reverse its downtrend.
Skillz is a high-risk investment even after considering the stock’s fall to yearly lows. Shareholders expect improving results from here, especially after it raised another $300 million from capital markets.
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.