It’s Time to Buy the Bottom on Beaten Down SKLZ Stock

Coming into the new year, Skillz (NASDAQ:SKLZ) continues to post fantastic revenue growth. Unfortunately, this did not translate to gains for investors. SKLZ stock has had an abysmal performance in 2021. The stock lost 90% of its value as it dropped from a high of $45.

For sure, the company was trading at inflated valuations in the past. However, I believe we could be close to a bottom.

Skillz Launches India Pilot

Despite the negative sentiment faced by the tech industry, there is still plenty of reasons to be excited about Skillz’s future. The company recently announced a live pilot launch in India as it continues to scale its global footprint. According to the company’s press release:

Players in the region will soon be able to deposit in rupees in the free download title Diamond Strike, a Skillz-owned and operated game and platform, to pilot the latest innovations and features. For the first time, players can compete in a localized experience against other players located in India. With this initial release, the company will collect player feedback and insights to hone the experience before rolling it out to additional games on the Skillz platform.

India is a potentially massive market for Skillz. The gaming sector in the country is growing at an accelerated rate much faster than traditional media. The gaming market in India has grown around 40% in 2019-2020. Unlike in the U.S., the gaming industry in India is dominated by mobile. Around 86% of the market consists of mobile phone users. This makes it the ideal market for Skillz to expand.

SKLZ Stock Could Head Lower

Investors typically use the price-sales (P/S) ratio to evaluate tech stocks. This is because a lot of tech stocks are still in the pre-earnings phase of their business. In this phase what ultimately matters is sales as these companies race to achieve economies of scale.

Currently, Skillz has a trailing 12-month P/S ratio of 5.1x. This is higher than the industry’s average P/S ratio of 4x. However taking into account only companies in the software sector, the industry’s average P/S ratio is actually 5.7x. Using these as the proper comparables, we can see that SKLZ stock is reasonably valued on a relative basis.

The issue then becomes while SKLZ stock is fairly valued relative to the software industry there is currently a market-wide rotation out of growth into value. This isn’t good news as it means the market may have been assigning too generous a premium toward risky assets.

Goldman Sachs’ index of unprofitable tech stocks has been crushed in recent weeks. This index has now drastically underperformed other indexes and continues to head even lower. The P/S ratio of the entire industry could sink even further.

Investor Takeaway

I believe there remains plenty of reason to be optimistic despite the poor performance of SKLZ stock. Skillz does not include potential revenue from India in its revenue guidance. Therefore analysts may not have included these additional revenues in their financial models. The mobile gaming industry in India is expected to reach $5 billion by 2025. This could translate to a large revenue surprise sending SKLZ stock higher.

Furthermore, tech platforms like Skillz tend to be a “winner take most” market where only a handful of firms have the majority of market share. This is why in bullish market environments investors often give tech stocks a pass. The hope is that these companies eventually grow large enough to dominate an industry.

SKLZ stock could see some upside if market sentiment on growth stocks reverses. The company is doing well as it continues to expand its market. I don’t know how long this downtrend on SKLZ stock will last. Therefore I am keeping an eye out for the bottom.

On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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