A year ago, Skillz (NYSE:SKLZ) stock hit a 52-week high of $32.87. SKLZ stock has lost more than 90% of its value in the 52 weeks since. As I write this, Skillz’s share price is up more than 24% in midday trading.
If you’re a very aggressive investor, this latest bounce could signify: I’m not the only one who believes the video game competition platform’s share price has bottomed. I believe SKLZ stock is an excellent Hail Mary bet. Here’s why.
SKLZ Stock and Its Cash
As of the end of December, Skillz had $643 million in cash, short-term and long-term marketable securities, and $399 million in total liabilities. On a liquidation basis, the company is worth $344 million. That’s assuming the remaining $280 million in assets on its balance sheet are worthless.
Based on 409.7 million shares outstanding, that works out to 84 cents per share. At $2.82 a share, SKLZ stock is currently valued at 3.3x its liquid cash.
By comparison, Zynga (NASDAQ:ZNGA) has a liquidation value of -$2.1 billion [$1.1 billion in cash and marketable securities less $3.25 billion in total liabilities]. However, a big chunk of Zynga’s assets — $4.5 billion — are goodwill and intangible assets. On a liquidation basis, those would be considered worthless. That’s unlikely, so it’s a bit of an apples-to-oranges comparison.
The point is that Skillz, in an absolute worst-case scenario, is worth 84 cents a share. So, your at-risk capital is less than $2 a share.
Of course, the skeptic could argue that Skillz used $180 million in free cash flow in 2021. But, given it’s likely to use more in 2022, the odds of Skillz’s liquidation value being 84 cents in December is remote. In fact, you could argue all signs point to it being half that amount.
Even in the worst-worst-case scenario, you’d likely get something in a liquidation. On the plus side, it’s also possible Skillz improves its pathway to profitability in 2022 and actually generates positive free cash flow.
One can hope.
Why Is It Up So Much?
There’s been no news that I can find, and it’s been three weeks since the company announced its fourth-quarter 2021 results. However, the company’s Game Developers Conference is coming up on March 23. It runs through March 25.
“Skillz’s unique, disruptive platform continues to democratize the mobile gaming industry by making it better and easier for developers to create, monetize, and grow their games through competition,” said Andrew Paradise, CEO of Skillz. “We look forward to sharing an exclusive first look at some of Skillz’s latest product innovations, services, and strategic partnerships at GDC that will further enable new and existing developers to build multi-million dollar franchises on the Skillz platform.”
While it’s exciting to think about the initiatives coming down the pike, it’s hard to imagine a press release two weeks out generating this buying interest. Something else must be going on, or all of the sellers took the day off.
Perhaps the best answer is that a rising tide lifts all boats. Nasdaq is up more than 2.2% on the day, while the Russell 2000 is doing even better than that. People are looking to put their money to work. Why not do so with a stock that lost 35% in February alone?
The Bottom Line
The last time I wrote about Skillz was just before it reported its Q4 2021 results. Unfortunately, they weren’t all that great. InvestorPlace’s Mark Hake recently discussed why the results suggest it could soon be trading for pennies. That’s because, over the next year, it could burn through half of its cash hoard, a possibility I alluded to earlier.
Hake believes the company has to lower its operating expenses. He’s not wrong. Between 2019 and 2021, Skillz’s sales and marketing expenses grew 318%, while its revenues rose by 220%. At some point, you have to flip those two numbers, or you’ll never make money.
However, if you look closely at some of its key financial metrics, you’ll see that there is some light at the end of the tunnel.
It finished Q4 2021 with 610,000 paying monthly active users (PMAUs), up 56% over Q4 2020 and 510,000 in Q3 2021, 19.6% higher on a sequential basis. If it continues to grow PMAUs by 20% each quarter, it will get to a million PMAUs by September.
In Q4 2021, its average revenue per average paying user (ARPPU) was $59.30, 2.6% higher than a year earlier. However, on a sequential basis from Q3 2021, it was down 10.9% to $59.30. Ideally, you’d like both numbers to keep moving higher.
ARPPU is not. That’s where I’d be most concerned. It’s not that it isn’t attracting lots of PMAUs; they’re not spending enough to improve the pathway to profitability. On the plus side, it could be worse. The year-over-year ARPPU numbers could be slowing. If that happens, it’s game over for Skillz.
There’s no question Skillz has a lot of question markets. It wouldn’t be trading where it is if it didn’t. That said, the picture painted about SKLZ stock right now isn’t entirely accurate. Business is better than it appears.
Under $3, I think it makes an excellent alternative to a lottery ticket.
On the date of publication, Will Ashworth 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.