Following a less than ideal earnings call on August 3rd, Skillz Inc. (NYSE: SKLZ) has taken a tumble – dissuading some investors of the stock’s potential. In reality, SKLZ stock has been declining since peaking in February when it reached a 52 week high of $31.61. Last quarter the company significantly underperformed, reporting a loss per share of $0.21 – which was $.12 more than analysts’ predictions. Whether this trend is indicative of an emerging issue within the company’s structure or merely a mishap resulting from a previous “covid bump”, SKLZ stock is a potential dip buying opportunity for long-term investors.
As an electronic gaming company, Skillz’s profitability and company structure is highly dependent on its user engagement. However, Skillz mainly offers single-player games similar to classic arcade games like Solitaire and 21 Blitz. While users compete in these mobile game competitions, the app does not support multiplayer games which typically attract more users thanks to their format. Therefore, customer acquisition costs are an essential part of SKLZ’s budget planning. However, for the six month period ending June 30th the number of total monthly active users (MAU) dropped to 2.5 million from 2.6 million in 2020 which may explain the stock’s decreased popularity.
SKLZ Stock Earning Call
The company’s CEO, Andrew Paradise, referenced a “covid bump” that has affected its comparative growth saying, “we’re definitely seeing elevated CPIs in Q2. And so we’ve been making quite a number of mid- and long-term investments” to mitigate them. For this reason, the company chose to reduce their user acquisition spending which had increased during Q1. In the earnings call, Paradise explained that while the company is optimizing its resources for engagement marketing and user acquisition, its focus is on user acquisition “but we’ll continue to exercise discipline in a high UAC (user acquisition cost ?) environment.”
Considering that SKLZ’s Q2 is typically adjusted due to seasonal pressures and that consumer acquisition costs (CAC) is volatile depending on the quarter, this news is far from a death sentence. But its Q2 2021 Net Loss was concerning given the $59.4 million increase from Q2 2020. However, this increase can be partly explained by the company’s redemption of $29.6 million in public warrants during Q2, leaving SKLZ with $692.8 million in cash and no debt. Now, SKLZ is in a good position to address some underlying issues, such as its monthly active users (MAU) and paying monthly active users (PMAU).
The company has explicitly specified that it sees monetizing non-paying users as a future opportunity because their current business model generates all its revenue from currently paying users. It appears that this model is working well for the company as its Payor Conversion rate increased 7% from the prior year and 2% from the previous quarter. This contributed to a 52% year over year revenue growth thanks to its corresponding 53% growth in PMAU. Yet – as of Q2 – 81% of SKLZ’ MAU were not payors. By focusing on scaling paying MAUs rather than general MAUs, SKLZ could be sacrificing an opportunity to establish itself as a consumer entertainment brand and capitalize on its first mover advantage.
Anticipating this issue, SKLZ has plans to acquire Aarki – a marketing demand-side platform with a background in the mobile gaming industry – for $150 million in cash and stock in Q3 2021. Aarki is a mobile marketing platform which uses machine learning and big data to “predict the likelihood that a new user will convert, engage, or make purchases within the app”. Given this acquisition, the heralded Ark Investment Management – led by Cathie Wood – purchased 22.66 million shares of SKLZ stock in June. Using this technology, SKLZ can monetize non-payors by selling their impressions to advertisers, thereby reducing CAC (consumer acquisition costs) over time.
However, its PMAU has dropped from 467 thousand in Q1 to 460 thousand in Q2 which may suggest a flattening MAU trend. This current trajectory may change once SKLZ expands its audience beyond the USA. Considering the product’s global applicability, the company’s decision to launch in India later this year is well-timed. CEO Paradise explained his decision pointing out that “the international mobile gaming market is 4x larger than North America, but it currently represents less than 10%” of the company’s revenue. Based on the expectation that their addressable market will expand 65% and grow 4x faster than the United States, the company’s expansion has great potential.
This paired with the CEO’s long-term blueprint for entering education and fitness markets are bullish signs for investors hopeful that SKLZ stock will rally. To achieve these goals the company is relying on several key performance indicators such as engagement, retention, conversion, and monetization. Because the company’s repertoire of games are relatively simple and lack synchronous player capability, SKLZ has made a strategic partnership with Exit Games – known for its work with Sega, Square Enix, Ubisoft, Oculus and Bandai Namco.
This partnership is integral to achieving SKLZ’s KPI goals because developers can build battle royale style games using Exit’s game engine. Taking SKLZ stock to the next level with competitive, real-time gameplay, Exit Games’ multiplayer servers will help SKLZ retain and engage users who could later become PMAUs. In exchange, Skillz has made a worthwhile $50 million strategic investment in the company.
In the same vein, Skillz has made progress on its multi-year gaming agreement from April. The deal secured the company’s right to power a NFL-themed mobile game – a noteworthy addition to its collection of mobile esport games. Jointly hosting the global game developer challenge, Skillz and the NFL have whittled contestants down to 14 semi finalists who are currently developing their mobile games. The final game(s) will be launched and promoted in tandem with the 2022 NFL season, offering an incredible branding opportunity for SKLZ to expand upon its esports niche.
SKLZ Stock Forecast
At this point, Skillz seems to be doing everything right. Carefully lining up marketing opportunities and expanding its gaming capabilities will no doubt sustain its fundamental growth. Its business model appears to be successful thanks to AI-personalization which has made a noticeable difference in retaining and monetizing users. For the first half of 2021, SKLZ has increased the revenue generated per user by 72% which will likely continue throughout the year and as MAU increases. If SKLZ is successful in retaining this growth and upscaling with its strategic partnerships, a rally is likely.
SKLZ stock saw a notable sell off following its earnings call and has trended downward since. It’s support is near 10.48 with an underlying support of 10.10. Its resistance is near 12.08 with a secondary level near 12.63. With its RSI at 63.73, the stock is climbing. Similarly, its MACD is moving upwards with no sign of convergence. Accumulation has been trending down since July 20th but started turning around on the 23rd. The stock has been gaining ground following a positive market opening on the 20th and seems set to continue.
SKLZ Stock Price
SKLZ stock price today could fall lower than its current value of $11.03 and likely will not rebound to SKLZ stock price of June and July for some time. But SKLZ stock has seen similar dips to the $13 price mark in May and April. While SKLZ stock has now dipped lower and over a more extended time, the company’s structure and substantial plans for expansion are cause for investor confidence. In light of its low price point, SKLZ stock may prove to be a worthwhile investment.
Currently there are rumors of a potential takeover fueled by three industry sources which reported Skillz is one potential target of a merger or acquisition. If this is the case, SKILLZ holds a lot of promise as not only a long-term investment opportunity with potential returns on investment for shareholders, but also a short term play contingent upon a buyout. Given SKLZ’s established place in mobile esports, it offers many assets as a merger candidate which would be difficult to replicate elsewhere. If a merger or acquisition is finalized, SKLZ target stock price will be higher and the value to shareholders will be greater.
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