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Why I Sold Skillz

Aug. 01, 2021 3:10 PM ETSkillz Inc. (SKLZ)82 Comments
Alvaro Romero profile picture
Alvaro Romero


  • The company will grow at a lower rate than the mobile gaming market, as Skillz is focused in a niche and does not have the power to encompass the whole industry growth.
  • Revenue growth is already decelerating. Skillz projected -$14M in Adj. EBITDA for 2021 in their SPAC presentation. The company is already at -$31M in Q1.
  • The stock trades at an expensive 16x forward sales multiple. My 10-year discounted cash flow model gives a reasonable price in which Skillz might be a buy.
  • There are many options to invest in gaming or mobile gaming, hence, it makes no sense to be attached to Skillz unless you specifically want to invest in casual games.
Ocio gamer juega acción vídeo en teléfono móvil por la noche
mikkelwilliam/iStock via Getty Images

Even though Skillz's (NYSE:SKLZ) shares have fallen over 60% since all-time highs, the company is still expensive. The mobile gaming industry is promising, but casual games are only half of it. I believe the company is too optimistic about its growth estimates and is

This article was written by

Alvaro Romero profile picture
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Comments (82)

fnabais profile picture
The question is: If this is such a bad stock why did you buy it in the first place? And why did you take so long to write an article telling us that you sold shares long ago?
Alvaro Romero profile picture
a) I bought the stock when it was a SPAC, hence, there weren't any ER of Skillz where I could see how SG&A expenses were progressing (or MAUs and ARPU), valuation was a lot more difficult to calculate, no offerings had happened and no insider selling. We just had the SPAC presentation, I believe I attached some photos of it in the article. When several months passed, I realise estimates were too optimistic. In addition, I like to hold stocks and not sell unless I see too much uncertainty. This said, the company looked promising when the SPAC released the agreement (the stock price and also the company itself), sad it didn't end well (imo, of course).
b) That's not really my fault. I started to write articles here in July, so I couldn't have told you.
cwfuchs profile picture
It is remarkable that Skillz has been able to maintain its Gross Profit Rate at 95% in Q2.. .there are not many companies out there with such a good metric, which underpins that Skillz already has a functional business model.

The issue of the missing MAU's Growth will be overdone as soon as the integration of their Exit Investment gets traction, as this new channel will provide new and much more exciting gaming experiences to users and developers (AP gave some color about this via their NFL gaming contest). Obviously this process will take some time, but it already is underway.

Lastly, investors so far are not crediting enough Skillz Aarki purchase, which will already contribute with $13million in Revenue only in this coming 2nd half of 2021, but more important it will open channels to monetize the big non paying MAU audience via digital ads and possibly also open doors to the evolving betting world.

Therefore AP and his Team are in fact building up an interesting ecosystem around Skillz. This process takes some time, but the market so far does not seem to care. Nevertheless there is already a lot of negativity priced into the stock, reason why those who are willing to invest right now, probably will be able to take big profits within the next 12 to 24 months.
@cwfuchs Manipulation drives it up to $40.00, then down to $12.00, before the next move up.....
I have seen this in many stocks in a very short time......
cwfuchs profile picture

Bernard IV profile picture
I was never impressed with the product as well. What is the company mission? To enable cheap gambling apps?
@Bernard IV
So you don't know what the product is but you're unimpressed with it. Great, thanks.
Bernard IV profile picture
@SPAC to the Future The product enables peer to peer competitive gaming apps with wagered money as a prize (gambling).
@Bernard IV
Then why are you asking what the company's mission is??

I would call entering a skill based video game tournament gambling, and neither would U.S. law. Daily fantasy is far closer to gambling and still is not gambling under U.S. law (hence its legality long before igaming and online sports better)
Here is the investor letter - paying MAU actually down this quarter.....
And no mention of plans for India - here, or in the conference call.......

Alvaro Romero profile picture
@JackCr Yes, I discussed the earnings yesterday on Twitter. Basically, pMAUs down for the first time in their history, MAUs down again, EBITDA -31M again and SG&A expenses still huge, in line with previous. No catalyst, my bearish thesis remains unchanged.
TheAppInvestor profile picture
@Alvaro Romero "the literal definition of a game-changer for Skillz" cf the article. When you have to frame it with these words in a PR-reviewed letter.. that would scare me as an investor.
joeliebig profile picture
Holy smokes. I sold it in the 30s, regretting I failed to sold in the 40s ... but looking at this stock now, wow. So glad I didn't completely miss the offramp.
@joeliebig wow you’re such an amazing investor you should teach us all. Maybe start your own hedge fund.
Every bear thesis focuses on growing PMAU and the CAC / LTV ratio that comes with it. You and every other bearish author in here have made the same stale argument. We get it, SGA expenses as a % of revenue, are high. That's the most shallow, kind of lazy, argument out there...so lazy that it completely ignores Akari's impact on this exact metric (and it's impact on unpaid monthly users).

There's a ton of reasons why this company could fail, but none of them have to do with your analysis of the income statement.

Today's strategic investment will rapidly expedite this companies path to success. They need a mega-hit game which can't be done without the technology they have now made a stategic investment in. Now developers can make hit games (think fortnite, and mario cart type games) on the sklz platform and earn WAY more than they would otherwise. No longer are sklz developers limited to bingo and solitaire, now racing and shooting is possible. Not to mention the NFL game will be lightyears better than it would've have been without the use of this tech.

Also, unrelated, but i can't believe the owner selling shares in his business post IPO, after countless years in the trenches building it, is seen as a negative. Toughen up, the man and his team deserve to reap the rewards of the hard work they've put in and the large risks they've taken working on a startup instead of enjoying lucractive careers at established companies. To suggest otherwise is silly to me.
Additionally, discounting cash flows on a company like this is a complete and utter waste of time. There's no way you can project cash flows with a lick of accuracy a two years out, let alone 10 years out. When this company releases a blockbuster first person shooter, every piece of your DCF model gets thrown out the window.
Alvaro Romero profile picture
@SPAC to the Future "will" "will" "will" "need". I see many promises and few results while the risks are still there, I hope today's Q2 results change something.

I don't care if an owners sells shares, but Andrew Paradise sold right after an offering and pre-lock up. It's the timing.
Alvaro Romero profile picture
@SPAC to the Future DCF is complementary, you can see it's expensive just looking to the FWD P/S.
TheAppInvestor profile picture
Even at $14 a share, I do not understand SKLZ valuation compared to the actors of the gaming industry. They do not seem close to profitability, growth is slowing and worst of all, it seems they are unable to progress on profitability even as they grow.

They're not the online one, but personnally because I invest based on value and growth, not just growth, I will stay away from stocks like SKLZ, RBLX etc., that have extreme valuation compared to the industry.

SKLZ in 2020: $230M rev, $122M net LOSS, FCF -$60M --> valued at over $5B mkt cap
GRVY in 2020: $350M rev, $67M net PROFIT, FCF +$57M --> valued at $700M mkt cap

I have a hard time believing $SKLZ can scale so well, because so far it sure seems they don't and thus do not merit this valuation imho. I hope for everyone in it they I'm wrong. But it's an expensive bet.
Alvaro Romero profile picture
@omegabonobo I completely agree with you. Valuation is just unjustifiable, it's priced for perfection and the company is far from that. Skillz has too many risks.
@Alvaro Romero
until the game-changing strategic investment today that blows up any bear thesis.
Sorry bob, GRVY is not comparable to SKLZ and RBLX. GRVY is comparable to EA, ATVI, and TTWO. SKLZ and RBLX are comparable, maybe U as well.

Perhaps your lack of understanding of the industry and SKLZ business model is the reason your baffled by valuations. They dont develop games like GRVY, they're disrupting the indsutry for game developers overall, allowing them an opportunity to better monetize their hard work on the SKLZ platform and providing a new avenue of reaching gamers that didn't exist before, all while utilizing proprietary mobile tech.

It's disruptive a technology company which is exactly why Cathie Wood got involved. You can love or hate her, i don't really care I'm not championing her work, I'm just telling you why shes buying SKLZ while you're comparing it to companies with completely different business models. She sees the opportunity that many do not.
Et20 profile picture
I do not see a compelling product unfortunately.
Alvaro Romero profile picture
@Et20 Agree. Thanks for the comment.
Zero proof but you totally got out of the trade just before it cratered. Ok buddy.
Alvaro Romero profile picture
@Yield Chaser Just before it cratered? I wish. I held the stock since December, I had my shares up 200% in February and didn't sell. When I sold at 24$ my shares had decreased 50%!!! since February highs, so please don't tell me I got out just before it cratered.
Legacy Legends, LLC profile picture
Stay long, patience, you’ll get paid.
Wealth Insights profile picture
Congrats on selling at $24; profits are never a bad thing.

A few points of contention:

As others have pointed out, PAYING users is the key short-term metric. Skillz generates a high long-term return on cohorts, so yes, they spend aggressively to obtain them. MAU's eventually matter, but growth will be lumpy with hit games and new markets driving spurts of MAU growth. Hanging on quarterly MAU numbers is not the way to evaluate them IMO.

Also, I will respect your opinion on valuation, but acknowledging that they do not develop games and then comparing them to game developers to illustrate your point on valuation is a bit contradictory.

One last point, they are testing synchronous gameplay, the tech that enables live gaming sessions for genres such as FPS and Royale. So, yes, they rely on casual games, but it's certainly not their "focus" - it's early innings and not where the game will end :)

Time will tell, and I wish you luck.

For transparency, I am long since December.

Alvaro Romero profile picture
@Wealth Insights I could ignore every bearish point in my thesis if valuation wasn't this high. However, if I have to pay this kind of multiples, i'm going to look at everything.

I have no interest in seeing Skillz fall. I have pointed out every issue that the company has imo. (MAU numbers for instance). Regarding synchronous gameplay, I don't know, you trust them and I don't. I don't believe they will be able to develop as good FPS or battle Royale games as we already have, you do.

I wish you luck too, again, no interest in seeing Skillz fall.
@Alvaro Romero
Was wondering if today's news on Skillz' minority stake in Exit Games mitigates your bearish view. While it doesnt change the valuation, but it opens up new synergies and steady their timelines of supporting multiplayer synchronous content for developers - i believe they were targeting Q4 for support of this feature. This news came a day after your article so its possible that it would be news for you as well.
Alvaro Romero profile picture
@RangeAccrual Yes, it's news for me as well. I believe it's a great movement but it doesn't change anything until I see results such as expenses reduced, increasing MAUs, revenue accelerating again, etc.

It's all about results. The acquisitions are always great (at a fair price), but we've to see results.
How will the shares issued as warrants expire this month impact the share price?
Alvaro Romero profile picture
@JackCr Shareholders are getting diluted as there are now more shares outstanding. However, I believe this is already priced in.
I believe this won't be under $20 much longer imo
Alvaro Romero profile picture
@TheeSoluution The company announces Q2 earnings tomorrow. If earnings disappoint, be prepared to see the stock under $20 for much longer.
cwfuchs profile picture
Thanks for your insights. I have a question about the acquisition of Aarki, which should lead to the monetization of non-paying MAU's. Don't you think that this move could contribute to top (higher revenue) and bottom line (speeding up to positive EPS)?
Alvaro Romero profile picture
@cwfuchs The acquisition of Aarki could be great for developers and monetisation. However, it's too soon to say it will contribute to higher revenue or positive EPS.

If the acquisition goes as Skillz has planned, it can reduce SG&A expenses, increase revenue and accelerate positive EPS. But I believe Aarki is not enough (though it helps), they have to continue improving their advertising/marketing departments to reduce expenses, which are Skillz #1 problem imo.
typical SA article. nothing new to see here
As an avid gamer when I checked their games they were mediocre and I exited my investment at around 20 dollars having held from $13 ,I think this stock will sink unfortunately
Alvaro Romero profile picture
@ctevez86 I really appreciate your comment. I've been playing video games since I was a child and have the same opinion as you. The games are just too basic for any gamer. Perhaps casual players (age 40 to 60) can find them ok, but the gamers, who are mostly between 14 and 30 years, are not going to play them.

That's what I've tried to write in the article, you cannot have the whole market growth if you don't have the biggest group (14 to 30yrs) as clients.
cwfuchs profile picture
@Alvaro Romero

what I really do not get is why 'to lose time' in writing a negative article about Skillz if you do not own the stock anymore and on top of that still being meaningful bearish about its future development? What would be the logic behind this...?
Also IMHO bearish articles quite some times have a bullish bias, because they indicate that the overall selling process can be near to an end. Much more troubling to me is a descending stock to which 'everybody' is bullish about. In fact I wouldn't wonder if we soon would see some reaction to the upside.
Alvaro Romero profile picture
@cwfuchs I don't lose time because I enjoy writing. And I only write about stocks that I own or have owned because those are the stocks I've researched the most. You can do bearish or bullish articles so I don't understand your question.

My problem with Skillz is valuation. The company has its market, its niche, and can do well. I don't think the same about the stock though, valuation is too high even for the most bullish person on the planet. The price you pay for a company today vastly impacts your future returns.

I could be wrong, of course. But don't think that the stock cannot fall more just because it has already fall 60%. The company reports q2 earnings on Tuesday, this could either kill or revive the stock, I'll be discussing that on Twitter.
grok42 profile picture
Good article and I think the right conclusion for the current situation. There may be a network/platform moat for SKLZ in that the more players they have the more attractive the platform is to other players that are interested in trying to make money in tournaments, and thus the more attractive the platform is to game developers. My biggest problem with SKLZ is they just don't seem to be getting enough traction, at least at the moment. If there was an accelerating trend of new games with rapidly growing MAUs on the platform it would be a lot more interesting. This could happen but really would like to see the evidence for that. Also folks are very enthusiastic about the NFL strategy. But there are a lot of games already out there in that space and it is not clear if a new game will be successful. Still a smart move on SKLZ's part, just not sure what the probability of success is.
Alvaro Romero profile picture
@grok42 Agree. The company reports q2 earnings on Tuesday, I'll let you know if anything has changed with UA marketing expenses, MAUs, pMAU, and everything. On Twitter, because SA doesn't let me write about the same company in the same week.
ARK decreased the position recently. I never liked SKLZ. There are too many better companies trading at a discount.
Alvaro Romero profile picture
@Stoks4Life04 ARK does a lot of short-term "trade" in my opinion. Perhaps they believe that q2 earnings are going to disappoint and want to pick the stock lower on Wednesday . Not the first time they do that.

Agree with the rest.
@Stoks4Life04 Are you referring to others in the same industry as $SKLZ? Which ones do you like in particular?
ndardick profile picture
What should I infer when 4/5 people who comment can't speak properly?
That they spend more time playing games than reading.
That they spend more time playing games than reading.
Too many hole
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