A Continued Sell-Off Makes Skillz a Good Long-Term Value

Growth stocks have been out of favor for the past few months, and Skillz (NYSE:SKLZ) stock is one name that investors have been dumping en masse.

Skillz company logo on a website
Source: Dennis Diatel / Shutterstock.com

There is a lot of fear in the market due to increased geopolitical tensions along with inflation. In these market conditions, a lot of investors are buying precious metals and selling stocks that can be considered “high risk.”

Even Cathie Woods has thrown in the towel on SKLZ stock, dumping her shares. SKLZ had been in a downtrend since June last year. Yet the pain still continued for holders and bottom fishers in 2022.

This year alone Skillz dropped from around $7.60 to its current price of $2.15. Due to the decline in price, is SKLZ stock finally in “deep value” territory?

Skillz Misses Expectations

Skillz recently released its latest earnings report. Unfortunately, it was seen as a disappointment to investors. This is a market environment where there is a lot of fear, uncertainty, and doubt. Thus any earnings miss is going to be heavily punished by the market. SKLZ stock is no exception to this rule, especially as the technical picture has already been looking bleak.

In the latest quarter, Skillz’s revenue rose by 61% from a year ago to $109 million. The company’s full-year revenue was $384.1 million. Revenue growth for the quarter and to close the year was extraordinary. Unfortunately, Skillz did not hit Wall Street analysts’ target of $389 million.

The revenue miss was only 1%, yet the effect on SKLZ stock was quite dramatic. The stock fell by more than 20% during the earnings release. There was a high volume on that day at 42.8 million shares moved compared to the usual 14 million. This indicates that investors were heavily dumping shares and running for the exits.

For sure, the world situation was magnifying investors’ fears. But Skillz’ management also threw fuel into that fire with its lackluster guidance. The company guided to revenues of $400 million for 2022. The guidance given was a lot lower than the $549 million expected by Wall Street.

There Are Bright Spots in the Report

There are some bright spots though with regard to Skillz’s latest performance. The company has 3.7 million monthly active users. The number of users was much higher than the 2.4 million monthly active users in 2020. However, only a fraction of these users were paying. The vast majority are free users.

Skillz’s paid monthly active users is only 610,000. This metric rose by 56% in in the fourth quarter from 390,000 a year ago. The average revenue per paying user also rose by 8.8% from $59.20 to $62.40. The company’s overall growth trends are impressive and heading in the right direction. However, management needs to work harder in converting its large player base from free to paying.

The company needs to improve its conversion metrics without blowing its marketing spend and simply pay for users. Last year’s marketing spend was 49% of 2021 EBITDA. I think the company is well aware of its issues and is making intelligent steps to correct this. Management expects to reduce marketing spending by about 10% of revenue. This should provide an easy uplift of the EBITDA numbers.

Your Takeaway on SKLZ Stock

According to Skillz CEO Andrew Paradise, “We are now entering a new phase, where we will shift focus to profitable growth through improving marketing efficiency, and deploying fewer but more impactful product features.”

I am hoping to see new and exciting features in the months to come. SKLZ stock is still on a downtrend and may continue to get beaten. However, the company is building the foundation for the long term.

If investor sentiment turns bullish once again, SKLZ stock could rally hard. I would put the stock on your watchlist.

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.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.

Article printed from InvestorPlace Media, https://investorplace.com/2022/03/a-continued-sell-off-makes-sklz-stock-a-good-long-term-value/.

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