2023-04-25 16:08:27 ET
Summary
- Skillz's prospects are running out of time.
- Skillz's executive management, including what is perhaps one of the shortest stints as a CFO at a public company, Alvin Lobo, steps down from the company.
- Skillz's stock-based compensation in 2022 increases by 79% y/y.
Investment Thesis
Skillz ( SKLZ ) has recently seen a mass exodus at the company. Recall Warren Buffett's quote, that time is the friend of the wonderful company, the enemy of the mediocre.
And for Skillz's prospects, it's time up.
When Everyone Gives Up, Even the Company
Skillz has opted to reduce its communication with investors, with no more shareholder letters. Back in Q3 2022, Skillz's CEO Andrew Paradise stated ,
It will take some time to address the four pillars and to lay them out. So this quarter we opted not to do a shareholder letter as we reconsider how we communicate with investors.
That's not to say that this action was the nail in the coffin for this investment, but it's probably insightful that since that moment the share price is down more than 60%.
- Furthermore, in the past month , Skillz's Chief Accounting Officer Stanley Mbugua decided to step away from the company after being with Skillz in that role for about one and a half years.
- But Chief Accounting Officer wasn't alone. It was also time up for Skillz's Chief Financial Officer Alvin Lobo, who joined Skillz in that position just over a month and a half ago to also recently call it a day.
- Contemporaneous as the CFO Lobo stepping down, General Counsel and Corporate Secretary Ms. Edelman also stepped down, after being with Skillz in different positions for about 2 years. And for her time, her severance package was about $320,000.
So how should investors think about Skillz's prospects for 2023?
Revenue Growth Rates Don't Inspire Any Hope
The purpose of investing is to deploy capital today into a business that's likely to grow its underlying profitability over the next several years. It's truly not more complicated than this.
Yes, you want to buy a stock at a cheap valuation, but crucially, it's important to understand the medium-term prospects of the business.
And Skillz's free cash flow is substantially negative and shows no signs of abating, as it used more than $170 million of free cash flow in 2022 and 2021. According to my estimates, on the back of its recently negotiated 10.250% Secured Notes , Skills will be having to at least $25 million per year in interest payments alone, meaning that unless Skillz finds a way to improve its operations, Skillz will run out of cash in about 3 years.
Meanwhile, as all this is unfolding, Skillz's stock-based compensation was up 79% y/y.
The Bottom Line
In 2022, while the share price tumbled by more than 70%, Skillz's CEO Andrew Paradise managed to take home more than $25 million in stock-based compensation, that's after taking home $75 million in stock-based compensation in the prior year.
As a business-minded investor, when I see this sort of practice, I find it difficult not to be infuriated.
That being said, ARK Investments ( ARKK ) continues to be more than willing to give Skillz the crucial time needed to turn around its operations.
However, for my part, I find it difficult to see many positive elements here. I believe it's time up.
For further details see:
Skillz: Time, The Enemy Of The Mediocre