Mobile gaming platform Skillz (NYSE: SKLZ) saw its price soar to fall again and reach new historic lows. The stock is now down 80% from its all-time high in February. There is no coating: it has not been a fun time for investors.
However, the Skillz plunge may have a silver lining for anyone looking to invest some fresh money today, as the stock is now trading at a much more reasonable valuation than before. In this video by Motley Fool Behind-the-Scenes Pass, recorded on October 5, Fool contributor Jon Quast explains to colleague Jason Hall why he thinks Skillz is now a good value stock, provided the company executes its business plan.
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Jason Hall: Jon, I think it’s going to be the same with the one you want to talk about.
Jon Quest: Yes. If I can, real quick I don’t wanna take it for granted [laughs] everyone knows what we’re talking about. SPAC, ad hoc acquisition company. They’re sort of Shell companies, also known as blank check companies. The reason they go public so they can raise millions of dollars, and then they go out and negotiate a merger deal with another private company. It is based on a stock price of $ 10. It is the basis of how the valuation of the company is determined.
What I like about SAVS in many ways is that it’s a way for these private companies to negotiate their own value and it’s a good influx of money without going through the whole introductory process. in stock exchange. There are some benefits for businesses.
When I see these things that are below the negotiated price of $ 10, for me it is something that piques my interest because I recognize that there is probably a lot of money from the PSPC merger on the balance sheet. Some that I would really like to know more about and that I do not yet know in many ways OppFi, competitor of Reached. Silver Lion, it’s a fintech company. And Offer block, an iBuying company in the real estate market. I don’t know these companies yet, but they are under $ 10. I am really interested in knowing more. I’m also interested in the one you’re going to talk about, Jason.
But the one I know is Skillz. I say this with fear and trembling because I know [laughs] that a lot of people are out of Skillz Stocks, including me. I’m probably the most bearish bull on Skillz.
Room: Bearish bull, I love that description and it is fair, and maybe we should all be bearish bulls on all of our stocks.
Quarter: [laughs] Well with Skillz I definitely see a long term benefit. However, I see many challenges that the company will have to overcome to be a better-than-market investment. You watch what it’s done, we climbed here shortly after it went public under the ticker SKLZ. Now we’re back down, but really, from that negotiated price of $ 10, we’ve only gone down about 12%. Let’s keep some things in perspective here.
But the thing with Skillz is that they still have to increase their sales. They have yet to attract new game developers to their platform. This is what they are proposing. They are offering a software kit for video game developers, so they need to attract more users and paying users who are actually investing money in the system.
Whether they do it or not, there are catalysts. They partnered up with a company in Europe called [Play Mechanix], maybe it will open up new kinds of games for them. I really see some good in it. Their last game, Big bucks hunter, is doing quite well in the App Store. This may be the next million dollar game for Skillz.
But what is interesting for investors today is that the valuation has become much more attractive. From that perspective, if they do execute, it actually becomes a much more reasonable or much more lucrative opportunity for investors. I just want to point out now on a fully diluted basis, Skillz’s market cap, the value of all of their shares including their outstanding warrants, things like that, roughly $ 3.9 billion. The company expects to achieve revenue of $ 389 million this year, so 10 times this year’s revenue is the valuation.
For a company that expects that revenue to grow 69% year over year, that’s actually a pretty decent estimate. Next year, they expect to have $ 555 million in revenue. This trades at seven times next year’s revenue, while increasing revenue to over 40% with gross margins of 95%, mind you. The valuation has become much more attractive. What matters now is that the business has to go out and run.
Room: Yes, that’s the key, and it’s one too that the execution needs to start showing in their cash flow. This is something you really need to pay attention to with this company because of some key elements of accounting for its income.
Jason Hall has no position in the stocks mentioned. Jon Quast owns shares of Skillz Inc. and Upstart Holdings, Inc. The Motley Fool owns and recommends shares of Skillz Inc. and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.