Mobile games platform provider Skillz Inc. (SKLZ) connects players in fair, fun, and meaningful competition. The San Francisco company made its stock market debut on December 17, 2020, merging with special purpose acquisition company (SPAC) Flying Eagle Acquisition Corp. On August 2, 2021, SKLZ formed a strategic partnership with Exit Games. However, SKLZ is currently being investigated for corporate governance failures, possible fiduciary duties breaches, and other law violations.

Consequently, the stock has lost 33.5% in price over the past three months and 31.1% over the past month, to close Friday’s trading session at $10.50. Moreover, it has declined 26.4% since reporting lackluster second-quarter earnings results on August 3 and hit its 52-week low of $10.06 on August 19. 

Also, SKLZ’s near-term prospects look bleak since a pandemic-driven surge in demand for mobile games could decline in the coming months.

Here are the factors that we think could influence SKLZ’s performance in the coming months:

Ongoing Investigation

A class-action lawsuit was filed against SKLZ recently on behalf of the purchasers of its securities between December 16, 2020, and April 19, 2021. It is alleged that the company made false or misleading statements regarding certain operations, performance metrics, and ultimate valuation, among others. For example, the complaint alleges that SKLZ failed to inform investors that downloads of the games that account for a majority share of its revenue have been declining since at least November 2020.

Lack of Profitability

SKLZ’s revenue increased 6.9% sequentially to $89.49 million for the second quarter ended June 30, 2021. However, the company’s monthly active users (MAUs) for the quarter declined 11.1% sequentially to 2.40 million. Furthermore, its loss from operations increased 297.1% year-over-year to $49.99 million. While its net loss increased 294.9% year-over-year to $79.60 million in the quarter, its loss per share came in at $0.21, up 200% year-over-year.

In terms of trailing-12-month levered FCF margin, however, SKLZ’s 9.07% is 20.6% lower than the 11.43% industry average. In addition, the stock’s trailing-12-month EBITDA margin is negative compared to the 21.42% industry average. And its trailing-12-month ROTC and ROTA are negative, versus   the 4.01% and 2.35% respective industry averages.

Acquisition of Aarki

Last month, SKLZ completed the acquisition of Aarki, a company that helps brands grow and re-engage their mobile users, using machine learning, big data, and engaging creativity. However, it is uncertain if Aarki can help SKLZ on the earnings front in the near term. Furthermore, Wells Fargo & Company (WFC) analyst Brian Fitzgerald noted recently that he doesn’t “see Aarki as an immediate game-changer in terms of accelerating paying user acquisition.”

POWR Ratings Reflect Bleak Prospects

SKLZ has an overall F rating, which equates to a 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. SKLZ has a D grade for Momentum, which is in sync with its 31.1% loss over the past month and 70.8% loss over the past six months.

The stock has a D grade for Growth, which is consistent with analysts’ expectations that its EPS will decrease 57.5% in the current year.

SKLZ has a D grade for Value also,  in sync with its forward EV/S and P/S of 9.07x and 10.85x, respectively, which are higher than the  2.58x and 1.70x industry averages. Also, it has an F grade for Stability.

SKLZ is ranked last of 23 stocks in the Entertainment - Toys & Video Games industry. Click here to access SKLZ’s ratings for Quality and Sentiment as well.

Bottom Line

SKLZ’s stock market debut attracted significant market attention last year. However, the company is not yet profitable, and analysts expect its EPS to remain negative in its fiscal year 2021 and 2022. Also, an ongoing lawsuit against it has yet to be resolved. So, we think the stock is best avoided now.

How Does Skillz (SKLZ) Stack Up Against its Peers?

While it’s better to avoid SKLZ now, one  might want to consider investing in top Entertainment - Toys & Video Games stocks with a B (Buy) rating, such as Spin Master Corp. (SNMSF), Electronic Arts Inc. (EA), and Sega Sammy Holdings Inc. (SGAMY).

SKLZ shares rose $0.36 (+3.43%) in premarket trading Monday. Year-to-date, SKLZ has declined -47.50%, versus a 19.36% rise in the benchmark S&P 500 index during the same period.

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.

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