SKLZ Update: 3-10-2021

    Skillz (SKLZ) reported solid numbers for the fourth quarter of 2020. I have not accessed the conference call yet, but I talked to a trusted colleague who was there, and everything was reportedly OK. The guidance could have been a bit stronger, but the overall performance is more than good, and management is probably leaving some room for upside surprises in the quarters ahead.

    The Update 

    Skillz reported $68 million in revenue during the quarter, an increase of 95% versus $35 million in the same quarter last year. It is interesting to note that management specifically highlighted in the press release that revenue was 8% higher than expectations. Even the headline of the press release is quite unusual: Skillz Outperforms Fourth Quarter and Full Year 2020 Financial Results.

    Skillz has been the target of an attack by a short-seller report in recent days. That report was quite lazy and even dumb in my opinion, and most of what they say in the report makes no sense. However, and especially in a market environment that is extremely unfavorable to growth stocks, these kinds of reports can hurt stock prices in the short term.

    Management is perhaps highlighting upfront that performance is above expectations to dissipate the bearish thesis from the short report. But some companies tend to pay special attention to market expectations, always trying to influence the market narrative around the stock. This is not something bad on its own, but delivering results is always much more important, and when the results are there the narrative tends to be bullish too. 

    This is important because guidance was solid but not overwhelming. Revenue guidance is for $366 million in 2021, which is in line with Wall Street forecasts. I am inclined to think that they are playing it safe and keeping expectations low in order to outperform those expectations in 2021.

    Back to the numbers in the most recent quarter, Gross Marketplace Volume –  GMV – grew 78% to $463 million. Gross profit increased 91% to $218 million during 2020, and gross profit margin was 95% of revenue during the quarter.

    Expenses in marketing and R&D jumped substantially during the quarter, and the company is still losing money because of these growth investments, but this is hardly a problem for such a young business with abundant potential.

    Management highlighted the NFL deal and expansion into India as the main growth drivers in the intermediate-term. The short-seller report was saying that the NFL deal was bogus, but the recent conference call is dissipating concerns around Skillz.

    A bigger guidance number would give me more confidence in the bullish thesis for Skillz, but the report was good and the company seems to be moving in the right direction. 

    The Timing

    Skillz took a 1-2 punch lately, as the company was affected by both the selloff in growth stocks and the short seller attack in recent weeks. The stock needs to remain above 24-25 in the short term, and it has a lot of room for appreciation if market conditions improve and the company keeps executing well. 

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    The Big Picture

    Skillz is at the intersection of digital transformation, gaming, and online games. The recent numbers from the company are not out of this world, but they are still strong.

    Market capitalization is $7.5 billion. The stock may seem expensive at a price to sales ratio of 26 for 2021, but small size and rapid growth opportunities can justify this price tag, especially if execution remains strong.

    Being so young and small, the company still has a lot to prove, and the risks are substantial across the board. Regulatory risk is also important because Skillz has games involving money, but the company is managing this well.

    The in-line guidance numbers are stopping me from increasing my bullishness levels for Skillz, but the thesis remains intact. If, and only if, I find something important in the conference call I will update this write-up.

    Disclosure: I am/we are long SKLZ.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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