2023-08-18 11:31:37 ET
Summary
- Skillz Inc.'s revenue growth has declined, and its underlying proposition has eroded.
- Skillz holds approximately $220 million of net cash, but is on track to burn close to $80 million this year.
- There is a significant likelihood that Skillz will burn through a further $70 million in cash by 2024, raising concerns about its viability.
Rapid Recap
Two months ago, I penned an analysis of Skillz Inc. ( SKLZ ) titled, ''Racing Against the Clock as Revenue Growth Declines,'' where I stated:
There's something structurally wrong with Skillz. There's no need to overcomplicate what is straightforward and easy to understand. The business' underlying proposition has eroded.
In the two months since I wrote that analysis, the share price has moved lower, and I now believe that $9 per share for Skillz will in time look like a mirage.
SKLZ author's work
That being said, the feedback I got from many readers was, if I'm so sure of my assertions, why do I not put a sell rating on this stock ? Why only a hold?
I explained that Skillz is a highly shorted company. That means that there can be a short covering event that can dramatically change this stock's performance in a short period of time, and I didn't want that outcome to detract from my long-term thesis, that this stock is best avoided.
In actuality, from the moment I published that analysis on 23rd June, the share price jumped +30% in a matter of weeks. Indeed, this all goes to show just how volatile SKLZ can be.
While we journey through this analysis, I wave a flag at a few bright spots, especially the strong balance sheet . Yet, let's not sprinkle fairy dust on the fact that this ship is sailing into the land of running out of time.
A Graph That's Worth a 1000 Words
The graphic above speaks for itself. There's something fundamentally wrong with Skillz. Irrespective of the comparables easing up in H2 2023, the fact of the matter is that Skillz's underlying value proposition has eroded.
Case in point, consider this:
Skillz's paying active users are down slightly over 50% y/y. This insight, above all else, should bring into question the viability of this business.
Balance Sheet, The Anchor Holding Skillz Back
Before we get to Skillz's balance sheet, allow me to highlight something from Skillz's recent earnings call :
[...] I will share the progress we're achieving and the further progress we expect to make over the second half of the year is encouraging. It provides me with a cautious optimism that we're on a pace to achieve our goal of generating adjusted EBITDA positive by the end of 2024.
The quote above is a reiteration that management remains optimistic that they'll reach positive EBITDA by the end of 2024. However, I am uncertain that Skillz will still be around by that time.
More specifically, Skillz holds approximately $220 million of net cash. Admittedly, for a business with a market cap of approximately $170 million, this looks bullish and supports the argument that Skillz is trading with a margin of safety.
However, keep in mind that Skillz is on track to burn close to $80 million of cash this year. Furthermore, given that its growth rates appear far from stabilizing, I believe there's a significant likelihood that Skillz's revenue base will continue to shrink in the next 12 months.
Consequently, I believe that there's a significant likelihood that in 2024 Skillz will burn through a further $70 million in free cash flow. Therefore, this means that over the next 18 months, Skillz's net cash position will probably be less than $100 million.
Which forces the next three questions.
- Firstly, will Skillz be able to raise capital to shore up its balance sheet?
- Secondly, does the fact that interest rates in the U.S. hover around 5% weaken Skillz's negation terms?
- Thirdly, if the business ends up in 18 months' time going from a strong net cash position to a net neutral position, where its cash and debt balance each other, does it significantly change investors' perception of the viability of this business?
I believe the answers to those three questions are all in the affirmative. Furthermore, what we've seen from Farfetch Limited's ( FTCH ) recent results is that as long as a business's balance sheet is in a fairly strong position, investors are more than willing to support its valuation.
But once the balance sheet tips into a perilous position, investors suddenly start to clamor for a very large margin of safety.
The Bottom Line
Two months ago, I penned a skeptical analysis of Skillz. I voiced my concerns about the company's structural issues and diminishing value proposition.
While I do acknowledge certain bright spots, notably the company's robust balance sheet, it's hard to ignore the bigger picture - this ship is sailing closer to the dangerous shores of running out of time.
The stark revenue decline graph reinforces my doubts, revealing a fundamental problem with Skillz's value proposition. I remain skeptical about Skillz's long-term survival, given its cash burn rate and shrinking revenue base.
The pivotal questions about its ability to raise capital, the impact of rising interest rates, and the changing investor perception due to a weakened balance sheet have answers that seem to lean toward uncertainty.
Amidst the unpredictable landscape of Skillz, it's not only the clock that's in a sprint; it's a race against time itself, with Skillz trying to outrun its own ticking shadow.
For further details see:
Skillz: Chasing The Clock's Shadow Amid A Shrinking Proposition