Why Skillz Is Woefully Misunderstood And Undervalued

Summary

• People like to bet. Skillz lets people legally bet on their video game play and win money. It's an entirely new form of entertainment and growing like crazy.
• In this volatile market, the SKLZ stock has suffered about a 95% drop in value and is now trading at "going-out-of-business" levels.
• But Skillz is not going out of business. They have created valuable assets and their cash burn can be cut quickly (which has already started).
• Skillz's upcoming NFL deal merges two strong money-making themes — betting and playing video football games — and is a strong driver of future earnings.
• I have A Strong Buy recommendation on the SKLZ stock.

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peepo/E+ via Getty Images

Thesis

Skillz (NYSE:SKLZ) is woefully misunderstood and undervalued. There, I said it, someone had to.

Misunderstood because investors think it's a video game company, when it's actually much more than that. It's also an enterprise software company... and a legal bookmaker for video games.

Undervalued because investors think the company will run out of money and are pricing it at near-cash levels. But an analysis of their cash burn, combined with operating statements made by the company during their recent earnings announcement and Investor Day calls, suggests otherwise.

Fall From Grace

Skillz has had a painful decline, culminating in a dramatic fall the day after announcing Q4 2021 earnings, crashing just under 20%, but at one point heading to a 40% shellacking.

Sure, it's not just SKLZ that has felt the pain. The whole market is down, with Nasdaq entering bear territory in early March. Gone are the days of easy money, where the market was handsomely rewarding "growth at any cost." As long as you were continuing to grow, your stock kept appreciating and if you ran out of money, you just floated a secondary offering at your elevated stock prices and, voila, the market gave you more money.

Maybe it was the end of the trillion dollar giveaways reducing liquidity in the market; or maybe it was rising deficits and oil and inflation and interest rates; or maybe it was bombs dropping on Ukraine and Russia receiving sanctions that inevitably will send ripples through the world's economy, but the market changed in Q1, and "growth at any cost" was now replaced with, "you better have everything you need to survive because you ain't gettin' anything more from us."

The market doesn't think so right now, but Skillz is one of the companies that has everything it needs to survive... and thrive.

Why This Company Is Special

Most investors think of Skillz as a video game company, and they do have several in-house games, but they are much more than this. Their primary focus is to provide an enterprise gaming platform for other software game developers. Making a game isn't easy. But the technical requirements to create a scalable enterprise gaming platform - one that handles billions of games per year - goes way beyond simple game construction. Big barriers-to-entry here.

Further, the enterprise gaming platform that they've built has an innovative business model. Advertising networks created a massive digital ad industry arbitraging between a buyer and seller of digital ads. Likewise, Skillz acts as an intermediary between two similarly-skilled players in a video game competition and takes a percentage of their "entry" fees.

Said another way, Skillz allows two players to bet each other... with Skills acting as the "house"... a.k.a., the "bookie." And as it turns out, there is more upside to being a bookmaker in this particular market than may meet the eye. Imagine an enterprise software company that figured out how to become THE bookmaker for the ENTIRE video game world. That's Skillz.

Online Competition Content Much Larger Than Offline

While traditional sportsbooks allow you to bet on football, basketball, soccer, and maybe a handful of other physical-world sports, Skillz is the bookmaker for potentially every video game in the world. The content for their potential market dwarfs what a traditional sportsbook can ever hope to address.

For example, you might be familiar with a new game causing quite a sensation called Wordle. It didn't exist several months ago. But now it has millions of players. It's a game that was created out of digital bits & bytes, i.e., thin airthin air. And it's only a matter of time when, with Skillz, you'll be able to bet someone you can solve the secret word in fewer guesses than them.

This shouldn't be a surprise, though, hit video games are created all the time. But when was the last time a new physical sport was created that you could wager on? Not for a while. Skillz is the only betting game in town that has the potential to take advantage of an ever-expanding universe of digital content.

What Everyone Missed From The Conference Call

One of the two most important statements in Skillz's most recent conference call wasn't when the company said they had a lot of money in the bank (gross almost three-fourths of a billion dollars); or solid revenues, almost $109 million for the quarter, up 61% from last year; or 610,000 paying players, up 56% from last year.

It was when the company said, "... and we've been listening to your feedback." Andrew Paradise, CEO, attributed this to shareholders. Maybe. But we also all know it was pretty hard not to hear the market crushing the life out of the stock price, too. Regardless, he continued with a welcomed statement for any public company operating today: "... we will transition from our strategy of revenue growth at all costs to increasing profitable growth and efficiency."

And the second most important statement... the one that everyone seems to have missed? Casey Chafkin, CRO, saying in context to reducing marketing spend, "... the result of that is going to be, and already is...". That is, that the transition away from "growth at all costs" has already begun.

But can they really turn on a dime? Those that run businesses know they can. Because unlike headcount, facilities, or equipment costs - areas that are hard to cut and where it takes time to see savings - 73% of their 2021 costs were attributed to "Sales and marketing"... and many of these costs are straightforward to turn off.

You literally say, "stop," and they simply stop. Chafkin even confirmed that on their March 15th Investor Day webcast.

Further, Skillz shared their exact new user acquisition costs for Q4 2021, $85.6 million. Compare that to their reported $99.0 million loss for the quarter. Knowing the bulk of this spending was ineffective and is now being cut, imagine what Q4 earnings could have looked like if they started cutting last quarter. Revenue would not have been impacted much, but instead of a ($0.25) per share loss - with a ($0.10) expectation miss - it might have been a $0.10 beat... and optically more important, a ($0.05) loss would have seemed tantalizingly near breakeven. That's hardly a company going out of business.

Actually, that would be a company way ahead of plan.

Net Loss would have looked quite different if ineffective new user acquisition costs weren't a part of the Sales and Marketing expense line. (Source: Skillz Q4 2021 Earnings Press Release)

Since Chafkin also confirmed in the Investor Day Q&A that the actual cutting started in early Feb, we now could see up to a $40 million savings, or up to a $0.10 per share beat in Q1 2022 results, too. That would be a nice surprise for a stock that could use a nice surprise.

Driving Future Earnings: The NFL

A winning combination: Betting and playing mobile football games. (Source: Actual screenshots from one of the new NFL games that is betting-enabled via Skillz.)

It's no secret that people like to bet on football. And it's also no secret that people like to play football video games like Madden. Capitalizing on these, SKLZ has forged a partnership with none other than the NFL and are working with game developers to create NFL-branded football games that let you bet your opponent. Seriously, can you think of a more perfect union than playing NFL video games and betting?

I know many have reported on this strategic partnership but not in this way: That this is an incredibly compelling betting proposition. Betting will go together with video football games like, well, real football and betting.

(Hot-Off-The-Presses: Skillz is offering a sneak peak of all of their NFL-branded games at the 36th Annual Game Developers Conference Mar 23-25. Just an FYI for those that might not believe these are real.)

All Bookies Are Not Created Equal

Thinking about SKLZ as a bookmaker invites new valuation comparisons. One of the monster sportsbooks is DraftKings (DKNG). Both DraftKings and Skillz are online bookmakers. But one takes book for physical-world games, the other for digital games. And while DKNG has about 3x the revenues - and only about 2x the cash - DKNG is valued about 7x greater than SKLZ.

This suggests that either DKNG is trading over twice what it should be or SKLZ is trading at less than half. Given DKNG has more than 3x the analyst coverage, it's more likely they're better understood and it is SKLZ's valuation that's amiss by half. But I don't think this is a fair comparison because Skillz has material advantages over DraftKings. DKNG has limited physical-world gaming content they can monetize, while SKLZ's has virtually unlimited content potential.

Both may be considered bookmakers, but DKNG's action is considering gambling and thus they have vastly more regulatory requirements and legal expenses. However, SKLZ's action is not considered gambling, so Skillz doesn't bear those costs, a significant advantage.

And DraftKings has tons of competition. They have to spend heavily to get into a market and heavily to protect it. Skillz has zero competitors, they invented their market. An awesome - and rare - advantage in business. So comparing SKLZ to DKNG might provide an initial valuation adjustment, but the more you dig into the business details, the better SKLZ looks. Translation: SKLZ shouldn't be trading at less than half the sales multiple of DKNG, it should be trading higher than DKNG's sales multiple.

Did SKLZ Really Guide Revenue Downward?

Skillz guided 2022 revenue downward, from $550 million to $400 million. Seems to me, though, they were being extra conservative. Even with no new customers, the company - with just its existing player base - is on a $435 million run rate.

And, per the conference call, they're working on improving existing player environment and social features. That's company speak for getting more money out of each player. Typically they could see a 50% lift from these kinds of activities - in fact, SKLZ actually bought one of the domain experts in this space: Aarki, so it's pretty conservative to project a small 10-15% bump to ARPPU (Average Revenue Per Playing User). That would jump revenues to about $480 million to $500 million.

And, as the company pointed out multiple times during their Investor Day, their guidance does not include the upcoming new NFL games. We can use existing data to help us project future potential here. Just three games accounted for almost 80% of SKLZ revenues in early 2021, or nearly an average of 27% each. It's important to note that these games do not have household brand names... like the NFL has. So it's not unreasonable for SKLZ's NFL games to achieve at least a similar average acceptance within the Skillz player base. As such, and factoring in about half-a-year of contribution, betting on NFL video games could add another 10%-15% to the top line, which pushes potential 2022 revenues to a $525-$565 million range. Right back to the initial forecast, eh?

Yes, there will be some existing player churn. But not included in the analysis above are any additional players SKLZ brings on due to the NFL helping to promote. The NFL has a really BIG megaphone, so of course Skillz will see new players... in fact, the numbers could actually rip much higher. What I think the analysis above says, though, is even looking at it pretty conservatively, their 2022 revenues could still be closer to $550 million than $400 million. Which of course no one is now anticipating.

Revising Misunderstood Price Targets

A few analysts lowered the price targets for SKLZ after their earnings call. The low is now $2.50. My range is $9.00-$12.00. This may be disappointing to those that purchased at higher levels but please know I think this is just over the next six months, so SKLZ will go higher as the company continues to prove it can execute along its new path. And, at least in the short term, it's a nice opportunity for everyone else. I get to my range by adjusting SKLZ sales multiple to that of DKNG, increasing by 50% to reflect my higher 2022 revenue estimate, and noting that SKLZ's short % of near 20% is scary high... which inevitably means overshooting when everyone rushes in to cover.

Risks

I think Skillz has been misguided in their big picture customer acquisition strategy. I believe it would be more effective if they spent less time trying to acquire individual players and more time trying to acquire gaming partners and require them to market to their individual players. After all, money is flowing to their partners.

I know many investors may want me to claim that Skillz's recent $300 million debt financing was misguided as well. After all, it was taken at an eyebrow-raising 10.25% rate. But given that the secondary market has now slammed shut, it feels more like management had a bit of foresight to sock away some extra $'s. With interest rates on the rise, who knows, we might look back and think the money is not all that expensive after all. Don't forget, with the way they're now operating the company, they may just surprise everyone and pay it back early.

Churn always worries me. It's usually bigger for non-betting app games, but smaller for betting games like casino slots and such. If it's close to the betting norm (1-2%), then I'm less worried.

The real lingering uncertainties I have revolve around the NFL. Are the new NFL games fun and competitive? And what is the business relationship with the NFL? Do the economics allow SKLZ to make a healthy profit; or did they have to sell their soul?

I'm actually OK with the first uncertainty because there are a lot of popular football games to serve as models… and I believe the added, all-important betting component will prove irresistible. People just like to bet on football and play football video games. I am worried about the second uncertainty, though. Having negotiated a partnership agreement with a professional sports franchise in the past, I know they can be quite one-sided. Since the NFL games are the key to the future, bad NFL economics could slow that future down.

Final Thoughts

Skillz Corporate Values (Source: Skillz "About Us" )

Many investors are wondering if SKLZ can turn things around. Here's something interesting to consider: Skillz actually has the word "frugality" in its corporate values statement. This should give all investors an idea of what kind of guy Paradise is… because that's not a very glamorous word (i.e., who wants to work for a frugal company?). So if he put it in such a visible place as the "About Us," it's genuine. I'll go even farther and say running a tight ship is in the CEO's wheelhouse... because he's a repeat, successful entrepreneur, so none of this is new to him.

So I don't think the company is going to run out of money like most analysts think, which, ultimately, has created the opportunity here. From trading at about 50x sales about a year ago, SKLZ is now trading at near gross cash levels. What that says is the market is valuing all the rest of the stuff in this enterprise software company - a proven model, scalable, sophisticated technology and infrastructure, an established base of paying players, great multi-year growth, an achievable path to profitability, and a deal with the all-powerful NFL that is also sure to attract other top brands - at just about nothing.

Honestly, at these levels, and with these assets, I don't know why some enterprise, gaming, or sportsbook outfit is just not trying to acquire them... in the same way I scratched my head that no one picked up Apple when its stock was depressed in 1996. And we all know how AAPL eventually did.

The CEO uses more acceptable language when describing the mission he's on: To become the "competition layer" of the Internet. That's fancy but I think investors might like my description even better: To become the bookmaker for every video game on the planet.

That sounds less like a bet and more like a winning investment.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SKLZ either through stock ownership, options, or other derivatives. 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.

This article cites my reasoning for recently opening a SKLZ position.

Comments

[six-oh]

Remember, after a stock falls 90%, it can always fall another 90%.

Oof.

[The Lone Contrarian]

@six-oh True dat!

[six-oh]

@The Lone Contrarian

You should write a post-mortem article examining what you missed with your "strong buy" article. It would be interesting and possibly helpful to the wave of new market participants who have always believed that "stonks" only go up.

[The Lone Contrarian]

@six-oh Normally I would say it's a great suggestion... but I don't think I've missed anything.... my "Strong Buy" has always been contingent on SKLZ fixing their broken fee structure... so I continue to believe it's a Strong Buy IF they fix their broken fee structure. If you read virtually every comment I write, I beat this like the proverbial dead horse. "Change the vig, change the world."

Now if someone at the company WILL ONLY LISTEN!

[The Lone Contrarian]

@JR Research Hi, JRR. I know you have an issue about SKLZ revs, including whatever the NFL games contribute (i.e., if they believe in the NFL numbers, they'd model it in).

I also know you have an issue that acquiring new customers may be broken because of IDFA stuff.

So I thought it might be interesting to model what Q2 Jun 2022 would look like *without* that stuff:

* *No* new customers
* Revenue decline greater than the company guided (back a full year to Q2 Jun 2021 level)
* Cut out a portion of those costs the company says it's addressing
* Include new costs they've mentioned (salary increases, bigger interest expense, etc.).

It's pretty eye-opening if you haven't done this.

I think it sets the company up for breakeven a lot sooner than the end of '24.

And with a straightforward business model change, I think '22 is a possibility.

Happy to compare notes, just let me know.

[LedZeppelin]

@The Lone Contrarian. I hope you are correct. I’m a really heavy Skillz user. I’m completely addicted to the site. Absolutely love it. And I’ve probably done $200 worth of buy ins this past month. The last couple Saturdays I’ve played Word Star for 6 hours. And I know a lot of the regulars do the same. The only thing that worries me is when their leaderboard payouts dwindle. I wonder if it’s an indicator of how well they’re doing, and whether Skillz will succeed. It seems to me to be the bread and butter that causes players to spend more.

I also noticed they have a game called Last Hope Shooter: Zombie FPS, which has incredible graphics, unlike the other casual games. I hope they can go this route with the NFL and UFC.

I wish they would partner with Garena. Free Fire released Lone Wolf Iron Cage, which would be perfect for Skillz.

I don’t have the financial chops that you and JR Research have, so I really appreciate your bear and bull arguments.

Thanks!

[The Lone Contrarian]

@LedZeppelin Thx for the nice nod.

I consider myself a pretty consistent player, too... but generally only an hour or so a day (ok, maybe a bit longer)... so not your level. Not that I wouldn't play more, the darn job gets in the way. ;)

Your observation about leaderboard payouts dwindling might actually be great news from the frontlines about their cost cutting progress.

I've noticed in my play, too, that I'm just not getting hit with as many "Buy $10, Get $10 Free" offers.

Both of these may suggest they're cooling their jets on giving away so much free money... which is *exactly* what they need to do to improve their bottom line... because unlike last year where all that matter was top line growth... all that matters now is getting to profitability.

Specifically they spent $57 million on these free cash give-a-ways in Q4... probably about $50 million more than they needed to... because it wasn't encouraging any new buy-in's, in fact, just the opposite -- they said it was *cannibalizing* existing buy-in's. Yikes.

Nothing like having real information from the front lines. :)

Re: Bread and butter: Agreed that winning more is always great incentive. But their secret sauce is it's tied to a fun game... because at the end of the day people want to play because it's a fun game to play. So if players have smaller payouts for a while -- because they're not artificially inflating things -- I think the "fun" factor is the "stickiness" that helps them weather this transition. And, it's only a matter of time before payouts increase again o-r-g-a-n-i-c-a-l-l-y.

Re: Incredible graphics: That's probably a Photon game... Skillz made a $50m investment in the company, so, yes, they're making the tech available to all their game developers... and push it as well.

Re: Partnering: The NFL, and now UFC, are such powerful brands, I think it's impossible not to see the pace of partnerships pick up.

[Inflexion]

As I stated earlier, this too was my biggest loss in 25 years of trading. The painful post mortem was it initially caught my eye because of Ark Investments. Love her or hate her Woods had an eye in 2020-21 for innovative stocks and returns. I relied on her team to due the DD I was too lazy to perform. Just taking the time to look at their website and game selection would have been a money saver. She too imploded and took her losses and moved on. Leaving dead money waiting for someday to return to much higher levels continues to cost you money.
For my own satisfaction, I will now take the remaining funds and swing trade this stock solely reduce my losses but I will not forget my mistake.

[David Harper, CFA]

@Inflexion Woods bought 23 million shares of SKLZ in April-May of 2021 and sold them < 9 months later for a >65% loss. She trades way too much (i,e., frenetically) to be an true investor in innovation.

[Inflexion]

@David Harper, CFA Woods had the same erratic trading style through 2020 when she had a hot hand and the fund's performance brought her into the limelight.
Her downfall is when she is in doubt or the position heads south she doubles and triples down. Many times she salvages a bad trade and exits with a small gain or loss but in the case of SKLZ the bounce never came and instead accelerated.
She is not alone in that world.

[bazooooka]

@Inflexion I think its worth a punt in the twos but I'd never triple down on something that burned me. Also hard stops should be used for those who have meaningful positions.

[nvacca]

Look, as a SKLZ bag holder with a $12 cost basis, I’m all for any hopium I can find on this trash can of a stock. But saying that Wordle was wildly successful and somehow assuming that means SKLZ can make money off it makes zero sense. Go to the Skillz website. All you see is dominoes, solitaire, bingo, etc. I should have sold this junk a long time ago, but at this point the cash I could generate from selling is so insignificant I’m just gonna let it ride. This is my worst investment EVER.

[The Lone Contrarian]

@nvacca I can't comment on why people bought at a higher sales multiple. But I do feel your pain, been there, too.

But I can comment why they should buy at the current SKLZ low sales multiple... and I apologize if this is redundant, I just made some of these comments to several others in a different response thread:

I think the current price -- which is close to gross cash levels -- IS the opportunity.

I haven't been able to put Skillz's new NFL 2-Minute Football down for over a week now. As I wrote in my last response, I literally have played a half-dozen games writing that response -- and I just played a few games right now -- and each time SKLZ was taking not one but *two* rakes. And we're still six months away from the season. "Just one more game."

So, yes, I am an investor *and* a customer. I don't know why they're not touting it on their website... maybe because it's still in a soft launch... maybe because we're still months away from the season. All I know is I'm an NFL fan (sadly my Skillz 49ers are doing better than my real 49ers)... and can't tell you how many times I've said, "just one more game" over the last week. But it's a lot.

If you haven't played the game, you should check it out. I'm pretty sure *many* NFL fans will.

As it relates to Wordle... it was just an example... the point is *any* game can be a Skillz game... meaning, Skillz can wrap it in a betting environment. And *if* Wordle ever became a Skillz game, then it would bring all of its millions of players to the table.

And the other point? That hit video games are being created all the time... which doesn't happen with physical world games... which is one of the reasons why I think SKLZ has more upside than Draftkings and should be trading at a *premium* to them, not at half their sales multiple.

Like all go-go companies, they're in the painful-for-investors transition between "growth at all cost" and get profitable. I absolutely believe this company can make this transition. 3/4 of a billion in gross cash. 3 million active players. Confirmation that the silly spending has stopped. NFL video game betting (with UFC to follow). Only game in town. Lots of players like me can't put the games down. Inaccurate to think that SKLZ doesn't have a lot of things going for it.

P.S. I liked the hopium reference! :)

[Dominic S]

I was a SKLZ Bull and sat on it for a long time but the last earnings call wiped me out. They need to prove they can retain or attract new players while also cutting massive ad expense before I can see their model actually working.

India was a disaster and the NFL game NOT being an 11 on 11 simulation is also a red flag.

I mean we really don’t know if this is a sustainable model if their expenses are more than their ad revenues

[The Lone Contrarian]

@Dominic S I totally get a "show me" approach... and I'd probably feel that way if I was disappointed quarter after quarter, too. India does sound like a disaster, but it would be great to have the company put that disaster in perspective for everyone. Obviously the lost opportunity is bad (and certainly was needed)... but did they spend $1m on it or $20m? Also, I don't get 11 on 11 games on a mobile phone, not the same as on a desktop, but I think that's mostly a style thing. Finally, if their RAEM was zero, I would agree there would be big questions about sustainability. But that's not the case.

[Rocksmani_00]

@Dominic S completely agree. I was holding for over an year n sold in d end after results, not worth investing. Crap business model.

[The Lone Contrarian]

@Rocksmani_00 I don't think it's a crap business model... I think they had an ineffective user engagement plan in 2H 2021. They thought they could bribe people who didn't want to pay with free money and that would get them paying... all that did was give away free money. That kind of thing has stopped. But what they're trying to do is great... they have 3 million active players... 610,000 that pay... but almost 2.4m that don't... so what's the business model to get people that don't want to pay to pay? The traditional approach is have them watch rewarded video ads... watch a short video, play a game or two or three. While these 2.4m players may not want to pay, they may want to win money... so maybe have a cheap subscription plan that allows them to enter a $1K or $5K daily tournament. Other ideas have been to sell skins and such.

The point is there are a lot of ways to monetize those 2.4m players... they just chose a bad one and it didn't work... but there are good ways out there... like YouTube, they just have to figure it out.

[The Lone Contrarian]

@JackCr What do I think of the UFC opportunity? I think it's an amazing fit and opportunity. Big, loyal, *betting* audience. Solid brand name. Fighting-style video games have always been hugely popular, as a retro player, I can't wait to bet someone in a Street-Fighter type, Photon-Engine enabled UFC game.

I think SKLZ outperformance today was a wake-up call... if people thought the NFL was some kind of one-off, that's absolutely not the case. UFC today. NBA, MLB,NHL, MLS, X-Games, and so soon.

Unfortunately I hit the show yesterday, before the news was announced today, so I only know what's in the press release. Only thing I'm bummed about is the announced 2023 timeframe, these kinds of things can't happen fast enough!

[Rocksmani_00]

Pump n dump! No body will buy if their execution is not right in next earnings call

[The Lone Contrarian]

@Rocksmani_00 Agreed execution has to be there! But not sure why this is "pump n dump," unless the company is lying to us... because they already said they started executing their cuts in early Feb. Also, they couldn't have lied about the NFL games because I'm already playing them. What makes this "pump n dump" for you pls?

[Rocksmani_00]

@The Lone Contrarian they have never executed properly. Losses mounting every quarter, customer acquisition is high. How do u see this a sustainable business model? Its not worth investing and hence not many institutional investors are on it. Even cathy wood closed shop in this after earnings

[The Lone Contrarian]

@Rocksmani_00 Cathie Wood sold off a lot of positions, not just SKLZ.

Problem is the market was rewarding losses... because it was only rewarding growth. So grow at any cost, and, because there's so much liquidity in the market, if you run out of money, we'll give you more!

But that changed abruptly in Q4. Now, it's all about profits.

They absolutely have a sustainable business model. Everyone likes to cite that they're only giving away free money, and when that stops, everything stops. But that's not true... that's why they created that RAEM metric -- "Revenues After Engagement Marketing." That metric nets out the free stuff... and when you look at it, it's still growing. Now, if RAEM was zero, then I would agree they don't have a sustainable model.

Note, some institutional investors can't invest in a stock under $5... which is why it might look like folks are just leaving.

The whole point of my article is: This is a company with assets... money in the bank... real revenues... real growth... a large base of loyal customers... great new partnerships with NFL and UFC. What they were doing isn't working now and the market is valuing them at near gross-cash levels. But since we have confirmation that the company started cutting all that ineffective (insane?) marketing in early Feb, things are setup for an earnings surprise in Q1. So the crazy low price IS the opportunity.

[Danjw2]

Been up 6 of the past 7 trading days (including today, which is not over as I type this). I'm guessing investors like what they've seen/heard at the Moscone Center.

[The Lone Contrarian]

@Danjw2 I won't disagree... but I think today was all about the UFC. Like the NFL, a great, global, extremely large betting audience. I think the proverbial lightbulb may have turned on from this announcement that there is real opportunity with these kinds of partnerships... NBA, MLB, NLH, MLS, X-games, etc... all great "competitive playing & wagering" fits with the company.

[MUGSLEY]

@The Lone Contrarian I hesitate to call sklz enterprise software as they are focused in the B2C space...I own Evolution Gaming which is the leading software platform in online casino....a pick and shovel on betting operators. They get revenue from licensing their own games + as much as 10% take rate from winnings...similar model to sklz but much more profitable w/ 70% ebitda margins. Always thought Sklz would be an interesting target for them. Paradise should defintely study their model as they strive to become a profitable business. Mgmt at Evolution is top notch.

[The Lone Contrarian]

@MUGSLEY Hello and congrats on your successes! I agree that SKLZ may seem schitzy... especially when their business model involves collecting from consumers (players)... but at their core they're b2b... developer2developer. I was at their happy hour at the Game Developers Conference in SF this afternoon and it was packed with game developers, just as you'd expect. I met a lot of management and thought they were top notch, too.

[Rocksmani_00]

I dont mind the stock owing at a higher late later, not a buy without execution. Lets see what comes in next quarter, its either $2 or below or $6

[The Lone Contrarian]

@Rocksmani_00 Fair enough! But, know that I felt the same way... and it was when they told us their actual timeline that I had a sense of comfort they were actually already executing (evaluated it in Dec, decided in Jan, pulled the trigger in early Feb).

And, something that influenced me as well: When they fessed up to India being a fiasco (i.e., hiring the wrong programming company... and, believe me, they're not the first U.S. company to choose a poor Indian programming partner). They could have spun that... who's in India to do due diligence? But they didn't. That took guts... the kind of guts you have when you know it's wrong and you know you already stopped it.

[Quinn195]

I actually like a few of their games, but I just can't get over the fact that their cut is 20% on your winnings. That number is so ridiculously high that you are essentially just paying to play the games, which I can't justify in my frugal mind. Not to mention the frequency at which you play them--every few minutes--means you compound that 20% cut very fast. At least with sports betting it's 10%, which is still rediculously high, but you only make a bet or 2 a day, so the losses aren't as noticable. Realistically the cut should be a few % like Poker or some casino table games. I actually think they could do just as well because the churn would be a lot lower, people would play more and the overall experience would be much better. I actually bought a little of the stock around $4, but I'm very lukewarm for many reasons including the one above.

What I think they should do is introduce a progressive % cut for the more you bet. Maybe 20% for the lowest stakes, but scale this down to 5% or less for the highest stakes.

Also, I think smarter people (with more money) would play these games, but anyone with a half a brain realizes what a truly terrible investment it is playing these games with any frequency.

If you agree (and it's possible) maybe put a word in at the next earnings call--sounds like you have been active in asking questions of management.

[The Lone Contrarian]

@Quinn195 Ha, I agree, they’re a lot more expensive than any of the bookies I know. ;)

One clarification: They say their take is 14.7%... but it appears to fluctuates given what 'prizes & incentives' are going on. I do know they've said they think they can drive that rate higher... which, like you, I think is already a mistake. A graduated rake makes a lot of sense.

Re: the compounding: Yes, their juice adds up quickly!

I'm heading up to the Game Developer Conference tomorrow, where they're showing off their other new NFL games. If I get the chance to talk to someone, I will.

[Quinn195]

@The Lone Contrarian cool, yeah I understand promos and whatnot cut into their take, plus they have to pay the game owner if licensing it. I played that 2 minute drill game today on your recommendation. Kinda fun, not really my type of game, but I can see how people that like that retro style would like it. Also it seems that maybe some type of subscription add-on model might make sense for them. I.e. for $9.99+ a month you can enter "free" daily contests and tournaments with variable daily prizes and subscribers get better loyalty points among other perks. Keep people hooked to the app where they can spend more on additional contests and boost recurring revenue. Offer the first month or two free to entice people. Maybe it's a bad idea...I don't know.

I appreciate you responding to all the comments.

[Quinn195]

@Quinn195 Also that 14.7% percent comes from this: you bet $3 to win $5 so they take $0.5 from each player which is .5/3= 16.7% minus the promos gets you to 14.7%. I calculate it at 20% because they take $1 out of the $5 prize.

For sportsbetting, I calculate it similarly at 10% because a -110 even odds bet of $10 gets you $18 so they take $2 out of $20. In sports betting there's only 1 side that's betting, while at Skilz they are taking their cut from each side. Using 14.7% the average player, which they ensure with their competitive matching, need only play 4 times to be out nearly half your money.

Each game takes only a minute or 2, so in 10 minutes you're out half your money. I mean gamblers aren't the most frugal types, but I think the casual user, when they see their balance halved after 10 minutes, just deletes the app and doesn't look back (even if they like the games).

And sure, you might be able to raise the take and squeeze out the most loyal customers, but their pockets only run so deep, and it's a pretty small pool of people.

I'm beating a dead horse here, but it's one thing I just think they've gotten horribly wrong, and also the reason I don't play the games anymore.

[Qichar]

People DO like to bet. They can just buy stock in unprofitable companies instead of spending time betting on the outcome of sub-par games.

[The Lone Contrarian]

@Qichar :) If SKLZ was profitable, would you think differently about it?

Re: sub-par games: Repeat of a response in case you missed:

Re: Game quality: I have two thoughts:

(1) I think they put $50m into Exit Games so they would have inside access to their Photon game engine... which means they understand that game quality counts, too. Certainly they put their money where their mouth is on that.

(2) I love great looking games, but there are a ton of ugly games that do really well. Terrible graphics didn't stop Zynga from creating a multi-billion company. I have a friend that has a mobile game with awful graphics... but that doesn't stop her incredibly loyal base of players from playing every day, seven days a week, 365 days a year, even on holidays. (I know because she complains about having to do customer service on those days!). One of my favorite games in the world was a retro game that actually used ascii characters. So while I think great graphics are certainly nice, I'm not sure they're necessary... especially in a game where the primary activity is WINNING MONEY. The winning money is, of course, key.

[David Harper, CFA]

@The Lone Contrarian to me this does speak to the missing link in the logic: Yes, sports betting is huge. Yes, videos game market is huge. But that's doesn't leap us to the next two levels automatically: 1. Is the video game betting market therefore huge? and 2. has SKLZ demonstrated it will have a share of that market? Their specific market has to be meaningful, and they have to be a leader in it, obviously. There are weaknesses on both levels. It's another reason the profligate, sustained S&M (line item, not all costs) is irresponsible, it clouds an ability to identify the truth. And, you'd definitely want to see evidence that they make excellent games, at the end of the day they are a video game platform.

[The Lone Contrarian]

@David Harper, CFA I haven't forgotten about our other thread, I am getting to it. :)

Re: this thread:

1 & 2) Right now the GAMBLING part of esports betting is huge... probably the most underappreciated opportunity in the gambling world. I bring this up because it speaks to the popularity of video games AND betting.

But that's not what SKLZ is pioneering... they're creating HEAD-TO-HEAD betting... and in this regard the market was $384m in 2021 (growing at 67% from 2020)... that is, the entire H2H market is 100% SKLZ.

Btw, there is a really interesting dynamic here... one that doesn't translate into physical-world betting. Someone may bet on football. And someone may play football. But in the physical world, there's no way to bet on yourself playing football (and how many people are good enough to do that?).

On the other hand, even non-athletes get pretty good at video games. For years they threw quarters into an arcade box to play the computer and their only prize was a point total. Now they can throw a few quarters into Skillz and if they beat an opponent of equal skill, they actually get money back. This is a *new* dynamic, but born out of *existing* habits... which I think makes it extra potent.

Re: profligate spending: Will address that in our other thread.

Re: Excellent games: They made excellent games... started playing NFL 2-Minute Football a few days ago and haven't stopped. Best game I play on mobile now.

[seankilroy]

Oh no. It’s perfectly understood and it’s a big dung heap. I’ve been saying this for a year now. The emperor has no clothes here. There’s weirdness with management and if Zynga and Gluu couldn’t do it with real marquee properties there was no way this was getting off the ground. When it was at $20 people used to argue with me about this and cite the NFL deal and tell me it was going to the moon. I wonder if anyone will pick a fight with me now? Probably. Denial ain’t just a river in Egypt. Anothe Motley Fool winner

[The Lone Contrarian]

@seankilroy Well, I agreed with you at $20 and all those other higher stock prices where the metrics (high sales multiple, big losses, etc.) were just wonky.

But we have new information... so, yes, I'll pick a fight with you now: ;)

* The stock isn't at $20 but has a $2 handle (which is when I wrote the article).

* That means the stock is trading at near gross cash levels.

* We also know the company has done an about-face on it's ridiculous marketing spending.

* In fact, we know that the cost-savings already started in early Feb, which means we should see some kind of earnings surprise *this* quarter.

* We also know the company is refreshing it's environment and going to use it's Aarki purchase to help "optimize" revs from existing paying customers (a nice way of saying they're going to try to extract *more* $'s out of them). These are smart and cost-effective things to do... easiest customer to get is an existing customer.

* We also know that the NFL games are *real*. I'm saying this because I've read many folks believing the NFL partnership was fake or such. It's not fake, it's on exactly the schedule they set out when they announced the deal last year.

* I also know the NFL games are real because I started playing NFL 2-Minute Football and haven't been able to put it down. :)

* Something I consider quite material: We now also know there is a much better comparables out there... for example DraftKings. For the life of me, I don't know why current analysts haven't called Skillz what it is: A bookie for video games. That's a good business to be in!

Lots of other stuff in the details of my article.

So why do you think it currently is a dung heap?

[darkhorse61]

This is a great article! Thank you!

[Franfran]

Wasted money, plenty of better things to invest in, this POS will go to Zero without doubts

[Seeking more alpha than you]

@Franfran since you feel it will go to zero without doubt, are you going to profit by taking a short position?

[The Lone Contrarian]

@Franfran No doubt there is a lot of pain with the stock. Absolutely reasonable to feel angry.

All the analysts and newsletters were excited because the market was valuing user growth, even unprofitable user growth.

Had things not changed... that is, money kept being free, we had crazy low interest rates, the gov't kept pumping TRILLIONS into the economy, who cared about the deficit, inflation hadn't reared it's ugly head, etc., their advice might still have merit... after all, no one complained when SKLZ was going up.

But things HAVE changed. And at least at this point in time, with SKLZ trading at near gross cash levels, and with cost cutting started in early Feb, and with the NFL games actually, really here, I think there is opportunity... which is why I wrote the article.

So why do you think SKLZ will "go to Zero without doubts" please?

[Franfran]

@The Lone Contrarian Because they will go bust. Ugly product, inexperienced management, stupid business plan. They were lucky to be valued stupidly high and to raise some money to get them pop along with their "pay our customers" business plan. They will need to stop doing that and customers will move on to the next stupid business plan maker =ZERO

[bazooooka]

Interesting

[rowenco]

This whole thing sounds like a TOTALLY CRAZY, UNPROFITABLE idea to me. In fact, sounds a lot like the zany ideas you find in the penny stocks.
I don't know this for a fact - or can prove it - but I would bet that probably 95% of the people that are playing these video games either don't have a job, or, if they do, they are living paycheck to paycheck. Lawyers and doctors and other people that have a lot of disposable income bet on football and basketball. Doubt many of them would bet on a video game. I could see people like MacDonalds workers maybe betting on them, tho. But can you make a $1 or $2 bet on a video game? That's probably the extent of their 'disposable' income. Don't get me wrong, here. MacDonalds worker are fine people, they just don't make a lot of money.
I can totally understand why this stock has lost 80 or 90% of its value (or whatever it is.) People do wake up every now and then.
Another thing for you longs to worry about is that Cathie Wood is buying it, and pretty heavily, too. Her picks of late have almost ALL been total losers. Check out her ARKK fund year to date - and how her fund did all of last year.

[cmabry]

@rowenco many people bet on sorts and video games…many people that you’d even think wouldn’t have the disposable income.

[The Lone Contrarian]

@rowenco While I agree with the spirit of your comment, I don't agree with it practically.

Today's generation of lawyers and doctors grew up with a Nintendo controller glued to their hands. 20 and 30 somethings care just as much about video games than they do physical-world sports... that's why e-sports is scaring the hell out of professional sporting leagues.

Here is an eye-opening perspective on this statement:

~~~~~

They project that there will be 84 million viewers of esports, higher than the 79 million MLB viewers or the 63 million NBA viewers. This is still dwarfed by the 141 million NFL viewers.

(onlinegrad.syracuse.edu/...)

~~~~~

Now imagine that SKLZ is the ONLY bookie in town for all of this action. THAT'S what makes this opportunity unique.

Re: ARKK: Has she started buying again? Everything I've read or heard is that she sold out of her SKLZ position.

[rowenco]

@The Lone Contrarian
You may be right about Cathie Wood's position. She did do a lot of selling in February. Whether she sold out her entire position I don't know. I'll take your word for it.

[kthor]

avoid!

[The Lone Contrarian]

@kthor Other than their incredibly painful decline... which was absolutely incredibly painful... what part of my analysis do you take issue with? Happy to address where I can.

[eurdone88]

Their games are garbage.

Unless they cut a deal with Nintendo or Sony or Microsoft, they'll remain garbage. I'll stick to my esports ETFs and avoid gambling on this stinker.

[The Lone Contrarian]

@eurdone88 They spent $50m buying into Exit Games to gain inside access to their Photon engine... to ratchet up the quality of their games. There will be a number of new NFL games this week on display at the Game Developers Conference (Moscone in SF)... so we'll have a lot more information in the coming days.

They have released one of the NFL games, though... NFL 2-Minute Football. I started playing it two days ago and can't put it down, for whatever one data point is worth.

Re: eSports: I know SKLZ likes to say they're esports... but they really aren't... in that people aren't *watching* each other play... which is the whole thing about esports (other than the top 0.01% of gamers that play professionally). What SKLZ's is is simply a way for those that enjoy playing video games to BET each other.

Re: Nintendo or Sony or Microsoft: Actually I can't believe SKLZ hasn't been acquired yet. I heard, but haven't confirmed, that Sony tried to enter this market and couldn't make things work. Imagine being able to bet on games in Japan, those folks are crazed for betting.

[eurdone88]

@The Lone Contrarian
It makes no sense why the major players don't host tournaments. I can't even play all the Mario Kart levels now without a Nintendo subscription. They nickel and dime us to death with all the addons, might as well have cash tournaments and matches to add some excitement.

Many people aren't even happy with the 2K sports series, so I doubt these games are going to attract serious gamers. Whoever has the best games will win, and as soon as the big players see there's a market for it, this company is toast. Video game ETFs offer me plenty of rewards without the risk.

[The Lone Contrarian]

@eurdone88 I've covered this a few times in my responses. But to summarize: SKLZ does care about their developers making great games, that's why they plunked $50m into Exit Games to have inside access to their Photon game engine. So they're putting their money where their mouth is. BUT, even though great games are wonderful, there are lots of games that suck that are incredibly popular. What's important to a lot of folks is being able to WIN money... a lot of people just like betting action.

[Cambridge STR]

I started buying SKLZ recently, with hope of timing the purchase price with it's low. Their Glassdoor rating is above 4. And LinkedIn shows they are very active in hiring. Growth rates are stellar. SKLZ will likely stay on my recurring share purchase list.

[The Lone Contrarian]

@williamwilliam Good info. Wish they weren't hiring in Northern California, though... tough to compete for tech talent against Apple, Google, Microsoft, Amazon, Salesforce, etc.