Mobile e-sports company Skillz Inc. (SKLZ) went public in December 2020 by merging with blank-check company Flying Eagle Acquisition Corp. SKLZ’s shares surged to their $46.30 all-time high on February 5 following the company’s signing of a multi-year gaming agreement with the National Football League (NFL). However, it is currently trading 61.3% below its high.

SKLZ’s  platform hosts several casual esports tournaments for games such as Tetris Clash, Solitaire Cube and Dominoes Gold. However, the company is not yet profitable, and several law firms are conducting investigations into it.

Furthermore, because the economy is reopening quickly, people are expected to spend less time on its esports platform. So, we think it’s wise to avoid the stock now. Here’s what we think could shape SKLZ’s performance in the near term:

Reopening Economy Doesn’t Bode Well for SKLZ

The demand for online games and esports increased at an extraordinary  rate amid the COVID-19 pandemic as people spent more  time at home and online. However, this growth is expected to taper off in 2021 as the economy gradually reopens and consumers spend increasingly more time away from  their homes. The U.S.’ coronavirus vaccination drive  is ahead of schedule and California, for example, aims to reopen its economy on June 15. So, while the recovering economy is good news for most, companies such as SKLZ that  rely on people spending more time at home, online, might be adversely affected.

Several Ongoing Investigations

On April 29, Bronstein, Gewirtz & Grossman, LLC announced that it is investigating concerns regarding whether SKLZ and certain of its officers and/or directors have violated federal securities laws. This is in connection to an article published by Bloomberg Law on April 27, 2021 titled, “Skillz eSports Founder Usurped Brother’s Trust, Lawsuit Says.”

Wolf Popper LLP is also investigating potential securities fraud claims on behalf of SKLZ’s shareholders. Wolfpack Research published a report in March 2021 titled “Skillz: It Takes Little Skill to See This Spectacular Disaster Coming.” The report alleges  that the growth projections SKLZ and its SPAC sponsor continue to present to investors are unrealistic.

Weak Financials

SKLZ’s revenue for its fiscal year 2020 fourth quarter (ended December 31, 2020) was  $67.72 million, which was 8% higher than expectations. However, its bottom line was not so impressive. Its net loss came in at $43.93 million for the quarter compared to $8.69 million in the prior-year period. Its loss from operations also came in at $43.24 million in the fourth quarter, while its net loss per share was  $0.14. Also, its average revenue per paying user (ARPPU) declined more than 12% year-over-year to $58.

POWR Ratings Reflect Bleak Prospects

SKLZ has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. Among  these categories, SKLZ has a D grade for Quality, which is consistent with its negative ROE and ROA.

It also has a D grade for Growth, which is justified given that its EPS is expected to remain negative in its fiscal years 2021 and  2022.

The stock has a F grade for Value, in sync with its 20.60x forward EV/Sales, which is 638.4% higher than the 2.79x industry average. In terms of forward Price/Sales, the stock’s 19.93x is 965.8% higher than the 1.87x industry average.

SKLZ is ranked #25 of 25 stocks in the Entertainment – Toys & Video Games industry. In addition to the POWR Ratings grades we’ve just highlighted above, one can see SKLZ’s ratings for Stability, Sentiment, and Momentum here.

Better than SKLZ: Click here to access seven top-rated stocks in the same industry.

Bottom Line

SKLZ hoped  to capitalize on the booming gaming industry when it went public last December. However, because the economy is now reopening and the COVID-19 pandemic is receding, consumers are less likely to spend as much time on its platform. Also, the company’s growth prospects do not support its stocks’ sky-high valuation because  its EPS is expected to remain negative in the coming quarters. So, we think it’s wise to avoid the stock now. 

SKLZ shares were trading at $17.75 per share on Friday morning, down $0.18 (-1.00%). Year-to-date, SKLZ has declined -11.25%, versus a 12.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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