Skillz Stock Is a Misunderstood Stock for Contrarians
Given the massive growth in smartphones, it’s not surprising to see continuous strong tailwinds for mobile gaming companies. And right now, the perfect mobile gaming play could be Skillz Inc (NASDAQ:SKLZ).
Unlike other gaming companies, Skillz doesn’t develop any of the games. Instead, developers provide the games and, in return, they receive shared revenues from Skillz Inc.
Technology guru Cathie Wood, from ARK Invest, sees potential in SKLZ stock, picking up 3.1 million shares in May.
Skillz stock isn’t giving current shareholders any reason to be happy, with its price down by 70% from its February high of $46.30 and down by 31% over the past month. However, you can’t ignore the strong tailwinds in mobile gaming that could drive a major rally in SKLZ stock.
Don’t Count Out SKLZ Stock
Skillz Inc isn’t for the faint-of-heart investor. Skillz stock has been everywhere over the past year.
SKLZ stock broke out from a sideways channel in November 2020, supported by strong relative strength and a moving average convergence/divergence (MACD) buy.
But after spiking to $46.30 in February, Skillz stock has been hemorrhaging after breaking below trendline support and the key moving averages in March.
Currently, SKLZ stock is searching for support after breaking back to its prior sideways channel below $15.00.
Chart courtesy of StockCharts.com
With the selling, the upside potential is significant. Skillz stock could easily rally back toward the next key resistance level at $25.00, representing a potential move of 80%.
Strong Revenue Growth to Continue
A look at Skillz Inc’s five-year revenue picture shows two strong years of growth to a record $230.1 million in 2020.
|Fiscal Year||Revenues (Millions)||Growth|
(Source: “Skillz Inc.” MarketWatch, last accessed August 2, 2021.)
Analysts estimate that Skillz Inc’s revenue growth will remain strong, at 63.5% to $376.2 million in 2021 and 46.4% to $550.6 million in 2022. (Source: “Skillz Inc. (SKLZ),” Yahoo! Finance, last accessed August 2, 2021.)
While Skillz Inc still trades at a hefty 10 times its forward 2022 consensus revenue estimate, that’s not unusual in this market.
The key for the company will be its ability to manage its cost side and move toward generally accepted accounting principles (GAAP) diluted earnings-per-share (EPS) income and profitability.
|Fiscal Year||GAAP Diluted EPS|
(Source: MarketWatch, op. cit.)
Adjusting for unusual items, Skillz Inc expects to report a loss of $0.48 per diluted share in full-year 2021 and narrow this to a loss of $0.31 in 2022. (Source: Yahoo! Finance, op. cit.)
The company’s free cash flow is still negative, but that’s not a surprise, considering the need to spend in order to drive up revenues.
|Fiscal Year||Free Cash Flow (Millions)|
(Source: MarketWatch, op. cit.)
Skillz Inc will have the resources and time to grow its business, given its debt-free balance sheet and $612.6 million in cash. (Source: Yahoo! Finance, op. cit.)
While Skillz Inc has been struggling in the stock market, I’m bullish on the mobile gaming sector and feel that the company will benefit.
Institutional investors have been jumping on board Skillz stock, which is always a good thing. Institutional ownership has increased to 240 institutions from 127 institutions in April. (Source: Yahoo! Finance, op. cit.)
In my view, Skillz Inc has plenty of work ahead to improve its situation, but given its share-price weakness, I like the risk/reward proposition for SKLZ stock.