At less than $4 per share, down more than 90% from its all-time highs, you may think that the dust has settled on the Skillz (NYSE:SKLZ) stock selloff. Yet, while shares in this company — which operates a real money competition mobile gaming platform — have become cheaper, they’re still far from being a bargain.
That is, the issues that have knocked it down over the past few months continue to persist. Skillz’s business model also remains flawed. It’s still forced to spend more than it takes in to acquire and retain users. Granted, it is making some strategic changes, in the hopes of lowering its reliance on this unsustainable strategy.
However, it’s too early to tell whether this change in its game plan will work. We’ll have a better idea when it next reports results on Wednesday, Feb. 23. Until tomorrow, though, it’s best to err on the side of caution.
Based on what we’ve seen play out in recent months, it’s better to expect that its destruction of shareholder value will continue. At least, that’s the takeaway, based on its continued high cash burn, coupled with its use of expensive debt capital to replenish its cash position.
For now, whether as a comeback play, a moonshot play, or something else, even the most risk-tolerant investors should steer clear.
The Latest With SKLZ Stock
It’s been a while since I last wrote about Skillz. My last article on it was published back in October. Yet in the time I last made the bear case for it, more, not less, has come out supporting my view.
First, the company released its financial results, for the quarter ending Sep 30, 2021. At first glance, its numbers may appear solid. 70% year-over-year (YOY) revenue growth, 47% YOY growth in paying monthly active users (MAU).
But along with the good, there was plenty of bad. Excluding a one-time item, operating losses were up sharply from the prior year’s quarter, rising from $28.6 million to $81.6 million. Also, quarterly revenue, while up substantially, was still slightly below sell-side estimates.
Furthermore, Skillz made a concerning financing move, by raising $300 million in a high-yield bond offering. When I say high-yield, I mean true high-yield: the secured notes had a double-digit coupon of 10.25%. Worse yet, the notes were sold at a discount, making the effective yield on them 11.6%. Having to resort to this type of financing is not a good sign.
Too Early to Tell Whether Turnaround Will Work
Already down big by last fall, the above-mentioned earnings and financing news applied more pressure on SKLZ stock. Combined with the market’s cycling out of growth plays, it’s not much of a surprise that shares have made their way to penny stock levels — or under $5 per share.
Despite the big drop, and the continued disappointment, you may still think it’s all uphill from here. Especially as the company is at work implementing a turnaround plan. What is its turnaround plan? It mostly entails improving the quality of games offered on its platform. By doing so, it hopes to reduce customer acquisition costs and its high churn rate of paying customers.
Admittedly, it’s better that Skillz has a plan of action, rather than no plan at all. That said, there’s no reason to buy it simply because it has a plan in place. Again, so far we’ve seen little to indicate that this strategy will enable it to narrow losses, without negatively impacting its rate of revenue growth.
The fact this isn’t producing immediate improvement is no surprise, either. After years of using high spending to fuel its growth, it’s going to take more than a quarter or two for its new game plan to (possibly) start having a positive impact. In the meantime? Much like another “story stocks” from last year that’s having to change horses midstream in ContextLogic (NASDAQ:WISH), things could get worse before they get better.
Bottom Line on SKLZ Stock
Earning an “F” rating in my Portfolio Grader, the bull case for Skillz stock today is built mainly on hope. Hope that by improving its appeal to mobile gaming enthusiasts, this company can fix its broken business model. In turn, make its way to the point of profitability.
I wouldn’t fully write off the prospect of this plan actually working. In fact, it may be unfair just yet to compare the situation to the situation with ContextLogic. That company is in the midst of severe revenue decline. Skillz, on the other hand, is continuing to achieve relatively high levels of revenue growth.
Still, it’s unclear whether the company will surprise Wall Street with its upcoming earnings release, or disappoint it once again. With all of that in mind, the move with SKLZ stock remains the same for now: avoid.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (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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