2023-03-27 01:11:37 ET
Summary
- Skillz is down nearly 85% over the last year as the market flashes red over declining revenue.
- Revenue has fallen for three consecutive quarters and was last down 41% over its year-ago comp.
- Efforts to improve the liquidity position by rapidly cutting costs will be difficult with a rapidly eroding revenue base.
Skillz ( SKLZ ) currently trades on a trailing 12-month price-to-sales multiple of 0.63x following an 84.5% decline in the price of its commons over the last year. The San Francisco-based mobile games competition platform once traded at high as $43 per share with a price-to-sales multiple of nearly 60x during the early 2021 SPAC bubble. It's retrospectively easy to see how bulls were swayed by management projections of rapid revenue growth and the company's inclusion in Cathie Wood's anchor ARK Innovation Fund ( ARKK ). Does the current depressed valuation present an opportunity or yet another likely-to-fail promise?
Skillz trades on a $217 million market cap to set the base for returns in 2023. Expectations are being built from a low base but the company faces a Sisyphean undertaking to arrest revenue under a sustained decline and to reduce net losses against a dwindling liquidity position. This is whilst pushing to regain compliance with the NYSE minimum stock listing requirement. To state that previously euphoric expectations for a company that once featured on CNBC's 2019 disruptor list have been replaced with dread and an almost sombre acceptance of failure would be apt.
Flagging Sales, Rising Net Losses, And Poor Liquidity
Skillz enables game developers to integrate and host casual esports tournaments for mobile players within their video games. The platform helps facilitate the matching of players based on skill levels and currently facilitates competitive games like Blackout Bingo, Solitaire Cube, and Dominoes Gold.
The fundamental issue facing the company is declining sales set against the backdrop of outsized net losses and cash burn. Revenue has been in decline since the start of its fiscal 2022 with sales for its last reported quarter of $60.3 million the third consecutive quarter of sales falling. This sustained decline has come on the back of what management states is a challenging macroeconomic environment for mobile gaming. This has caused poor retention of its mature users with cheating and fraudulent behaviour from new users in certain locations outside the US disrupting revenue. Skillz flagged the abuse of system discounts and incentives such as their friend referral program.
In the latter, users were able to get rewarded without delivering real user referrals. The company's reduction of its marketing spend has also had an impact with management being aggressive in their effort to cut costs and stem a cash burn position that threatens their future. Net loss for Skillz's fiscal 2022 third quarter came in at $78.5 million , a sequential increase from a loss of $60.6 million and a material deterioration from a broadly non-cash profit of $50.8 million in the year-ago comp. Revenue was a 41% decline from the year-ago comp with net losses forming 130% of revenue for the quarter. However, net losses during the quarter would have been outsized due to a one-time severance payment related to a round of job cuts being implemented to remove $10 million from their annual wage bull.
Requiem For A Lost Dream
The company is set to announce its fourth quarter results by the end of next week and the expectations are for revenue to come in at around $48.72 million , a roughly 55% decline from its year-ago comp. Negative GAAP EPS of $0.14 is set to improve sequentially from a third quarter negative EPS of $0.19.
Net losses have seen the company's cash and equivalents fall to $465 million as of the end of the third quarter from a peak of $692 million in the summer of 2021. Critically, cash burn from operations during the quarter came in at $21.8 million, a material sequential improvement from $61.6 million in the prior quarter and from $38.3 in the year-ago comp.
This forms the medium to longer-term hope for the bulls. I'd expect the next few quarters to be negative from a cash flow perspective but this is rapidly improving on the back of cost cuts. Hence, against a liquidity position that extended to $558 million when including marketable securities, the company's cash runway extends for more than 25 quarters, around six years. Skillz could now move to initiate a reverse stock split to maintain compliance with the NYSE minimum listing requirements as its works through the rightsizing of its operational cost footprint.
After adjusting for a total debt of $288.7 million, the company is holding a net cash position of around $270 million. As this forms 125% of its market cap, Skillz is now trading at less than cash on its balance sheet with a tangible book value of $325.6 million. This makes it hard to recommend the company as a sell even against its torrid revenue positioning. Whilst the company's near-term future will be clouded by uncertainty and could still be disappointing its strong liquidity position has provided a hedge against going concern risk and time for revenue to be stabilized. Further, the company is underway with restating its financials with its most material misstatements focusing on an increase in end-user tax liability, indirect tax liabilities in foreign jurisdictions, and impairment of some long-lived assets. These changes will be unlikely to have a positive impact on cash burn and its net cash position.
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Skillz Could Disappoint Everyone Again