2024-01-02 17:00:00 ET
Summary
- Today, we take a look at Skillz Inc., a company that has seen a significant decline in its paying user base since its peak in 2021.
- Management is implementing a turnaround strategy to reduce costs and improve platform engagement.
- Skillz has seen some significant improvements on the cost front and the stock trades for less than the net cash on the balance sheet.
- An analysis on Skillz Inc. follows in the paragraphs below.
I am always doing that which I cannot do, in order that I may learn how to do it ." - Pablo Picasso
Today, we put the spotlight on Skillz Inc. ( SKLZ ) , a company whose stock is very deep in Busted IPO territory since coming public in the SPAC craze of 2020/2021. The company has seen its paying user base shrink dramatically since it peaked in 2021. However, management has started to execute a turnaround strategy that has significantly shrunk costs and the stock trades for less than Skillz's net cash. Time to buy the dip in the shares or still too early to bet on the eventual turnaround of the company? An analysis follows below.
Company Overview:
Skillz, Inc. is headquartered in San Francisco, CA. The company operates a mobile gaming platform that provides proprietary online-hosted technology that enables independent game developers to host tournaments and provide competitive gaming activity to end-users. These games can be downloaded via the company's website or via third-party platforms. Skillz makes its revenue by taking a share of entry fees for paid contests. The company was founded in 2012 and came public in 2020. The stock currently trades just above six bucks a share and sports an approximate market capitalization of $135 million.
Third Quarter Results:
The company posted its Q3 numbers on November 8th. Skillz delivered a GAAP loss of $1.67 a share as revenues fell just over 38% on a year-over-year basis to $36.4 million. Both top and bottom-line results missed the analyst firm consensus. The company ended the third quarter with 168,000 paying monthly active users with an average spend of $72.30 a user. At its peak in 2021, the company had just over 600,000 paying users in comparison. Skillz's paid user conversion rate fell to 16% in the third quarter from 18% in the second quarter. However, acquisition costs also fell 66% from the same period a year ago and down 21% from the second quarter to $6.2 million. Overall, sales and marketing expenses fell 38% from 3Q2022 to $31.9 million.
Revenues have been roughly cut in half since FY2021 as the company was reliant on only a few core games. The company has responded by improving marketing efficiency and acquisition spending and focusing on boosting platform engagement, adding new product features as well as retention. Skillz is also trying to be less reliant on contractors and growing its lower cost employee base instead. An article on Seeking Alpha in October did a good job capturing why Skillz is in the bind it finds itself and the actions it is taking to get out of this hole.
Analyst Commentary & Balance Sheet:
Since third quarter results posted, both Wedbush ($15 price target) and Stifel Nicolaus ($10.50 price target, down from $13 previously) have reiterated Buy ratings on SKLZ. BTIG, Jefferies ($6 price target, up from $5 previously) and Citigroup ($5.50 price target) have maintained Hold ratings on the stock.
Nearly 19% of the outstanding float in the shares is currently held short. It appears the CEO purchased just over three million shares at an average price of under a buck in the second quarter. I am assuming he did so by exercising options. He also bought 75,000 shares at just over ten bucks a share in early August. The CFO sold just over 60,000 shares in two transactions, one in August and the other in November.
Skillz ended the third quarter with approximately $340 million in cash and marketable securities against just under $130 million in long-term debt. The company posted an approximate net loss of $33.5 million for the third quarter. The company has reduced debt by $160 million in the first nine months of 2023 and announced a $65 million stock buyback authorization over the summer. Total cash burn in the third quarter was $21 million.
Verdict:
Skillz, Inc. lost a whopping $21.40 a share in FY2022 on sales of nearly $270 million in FY2022. The current consensus analyst firm forecast is for losses to drop to $5.50 a share even as revenues shrink to some $159 million in FY2023. They see losses of $4.66 a share in FY2024 on flat sales.
At current trading levels, investors are getting the stock for substantially less than the net cash on Skillz's balance sheet. The problem around Skillz, obviously, is it is bleeding cash. However, revenues are projected to stabilize in the coming fiscal year.
The company is taking actions to stem the cash bleed and reduce costs. I personally think the shareholders would be better served if management used its stock buyback authorization to further reduce debt. I would also like to see more progress on the cash burn front, see paying users start to grow again and confirm revenues will stabilize in the quarters ahead before I would find the stock investable.
Every artist was first an amateur. ”? Ralph Waldo Emerson
For further details see:
Skillz Inc.: Still Early In Turning Around The Ship