Skillz (NYSE:SKLZ) reported excellent Q3 2021 earnings results on Nov. 3. Yet, investors chose to focus on the negative, sending SKLZ stock lower over the remainder of November.
As I write this, SKLZ is trading below $10 for the first time since mid-October. Before that, you have to go back to March 2020 when it was trading under the special purpose acquisition company (SPAC) name of Flying Eagle Acquisition Corp.
It’s a common occurrence for SPACs to trade a little below or a little above its IPO unit price until it finds a merger partner.
So, in terms of buying opportunities, if you’re a believer, as I am, now is an excellent time to buy this speculative stock. Here’s why.
SKLZ Stock Might Be Speculative
Just because Cathie Wood is accumulating SKLZ stock doesn’t mean you should too. If you’re using a non-taxable account, you probably don’t want to include SKLZ in your portfolio.
This is the case despite reporting a 70.5% increase in sales in the third quarter to $102.1 million while also delivering a record 510,000 paying monthly active users (PMAUs) in the period, up from 350,000 a year earlier.
Unfortunately, analysts were expecting revenue of $102.61 million, a $510,000 miss.
I suppose if you’re a CFA, and you believe that modeling can do no wrong, that it’s a big deal. But it’s not.
To get to $102.61 million in sales, they would have had to increase 71.0%, or 0.5 percentage points more than they did. That’s a blip on most people’s radar.
As I look at its Q3 2021 press release, I see increases across all of the significant metrics:
- MAUs were up 300,000 to 3 million.
- Its average revenue per user (ARPU) was up 53.2% YOY to $11.40.
- The average revenue per paying user (ARPPU) was up 15.5% to $66.82.
- Gross marketplace volume (GMV) — the total entry fees paid by users for contests hosted by Skillz’s platform — was $611 million, up 48.7% from last year.
- And, of course, PMAUs rose by 45.7% YOY.
I suppose you could nitpick about its $41.7 million adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss being $5.6 million higher than the analyst estimate. Still, it’s not like it was double or something.
It’s an overreaction for sure.
Where to From Here?
The company’s adjusted EBITDA through the first nine months of fiscal 2021 is $104.0 million, up from $42.3 million a year earlier.
However, that means it generated $2.65 in sales for every dollar of adjusted EBITDA loss, down from $3.84 of sales in the same period a year earlier.
The big reason for this is an 80% increase in sales and marketing expenses. As it continues to scale its platform, that isn’t something that’s going away anytime soon.
However, with $540 million in cash at the end of September, and no debt, it’s got plenty to withstand a couple of years of losses.
Wedbush analyst Michael Pachter expects the company’s launch of new games to drive future revenue. He expects Skillz to generate $390 million in revenue for all of 2021. He’s got a “Buy” rating and a $25 price target, more than double its current price.
Of the eight analysts covering SKLZ stock, Pachter’s target is the highest. Overall, the analysts rate it “Overweight” with an average target price of $16.57 and a median target price of $16, both well above its current price. It trades today at around $9.70.
Based on $2.65 in sales per dollar of adjusted EBITDA loss, it ought to lose $147 million on an adjusted EBITDA basis for all of 2021, up from $119.4 million a year earlier. It’s not the end of the world.
Through the first nine months of 2021, it spent $1.12 in sales and marketing to generate $1 in sales. That’s up from $1.06 in the same period a year earlier. That’s a 5.7% increase, hardly what you would call out of control.
I don’t see a problem continuing to spend a little more to acquire customers. Once it locks in those customers, it’s excellent recurring revenue.
As I said in my last article about Skillz, I think Cathie Wood will make out like a bandit on her Skillz investment. For the rest of you, mere mortals, if you can afford to lose 100% of your investment, below $10 is an excellent entry point.
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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.