SKLZ Stock Analysis: A much needed update

$SKLZ Investment Update: Hello all, It has been nearly 4 months since I first posted my analysis of $$KLZ. Since then, this investment idea has done terribly and is currently down 62%. This update post will help you to understand why this position has performed poorly over the past couple months. Furthermore, this update will provide recent news and events that can help $SKLZ to turn around, and potentially reach my target price set out in my original analysis (found here). Recent SEC Filings: Over the past couple of months there have been a tremendous number of filings between SKLZ and the SEC, however, I have narrowed down these filings by finding/presenting you with the 3 most important filings over the past 4 months. Q2 2021 Financial Report (10-Q): On August 3rd, 2021, SKLZ released their Q2 2021 earnings report, which had some points that I would like to highlight in this section. Firstly, SKLZ reported their 22nd quarter of consecutive growth, this is expected as it is a young, high-growth prospect, however their growth rate is very high. SKLZ was able to grow their revenues and profits by a factor of 52%, however they reported a greater net loss, and lower EBITDA. Overall, there is a lot of revenue growth however none of this growth is being transferred into SKLZ pockets, which is normal for a high growth stock, but is somewhat worrying. I am looking for them t turn this trend around in the next couple quarterly reports and start to decrease their net losses or else I will exit the position. Secondly, SKLZ acquired Aarki in July of 2021. Aarki is a demand-side marketing platform that has 465M active monthly users, data engines, and machine-learning algorithms that deliver high ROI to their advertising customers. This acquisition is very strategic and can help SKLZ to acquire users and monetize their platform more efficiently. This should help to drive in more revenues for both Aarki and Skillz. Additionally, SKLZ entered into a strategic partnership with “Exit Games”, in which they agreed to purchase a $50M minority stake in Exit Games. Exit Games is a German company that allows developers to create and host real-time multiplayer games (like SKLZ). This deal gives SKLZ the access/rights they need in order to use Exit Games’ technology to accelerate SKLZ’s multiplayer game growth, and for SKLZ to use in their eSports tournaments/platforms. Lastly, SKLZ announced their partnership with the NFL for NFL-branded mobile games. Currently there are 14 NFL-branded games being developed and SKLZ plans to choose just 3 of them to launch in 2022 or early 2023. Registration of Securities (S-1): On August 16th, 2021, SKLZ submitted/completed their S-1 filing, which means that they registered more Class A common shares. In this filing, SKLZ noted that they registered 4,401,615 shares at an offering price of $11.88, which diluted previously held shares by roughly 1%. These shares were granted to SKLZ CEO (Andrew Paradise) as a result of their “2020 Omnibus Incentive Plan”. CEO Compensation (Omnibus Incentive Plan) 8-K: On September 14th, 2021, SKLZ announced that they granted (not vested) Andrew Paradise a total of 16,119,540 Performance Stock Units (PSU’s) to be earned over the next year. Each PSU can be vested for 1 Class A common stock and is a part of SKLZ’s “2021 Omnibus Incentive Plan”. The 2021 and 2020 Incentive plans are nearly identical and follow the following framework. This plan outlines the total compensation available for Andrew if he meets certain performance thresholds. The total compensation (16.12M shares) is divided equally into 4 tranches (think of a tranche, the same way you think of slices of a pie), each containing 4,029,885 PRU’s. Each of these tranches is unlocked when Andrew (and the company (SKLZ)) meet certain performance measures. These tranches are unlocked after a SKLZ market cap reaches a certain multiple during the timeframe. The 4 performance milestones are 2x, 3x, 4x, and 5x. If Andrew is able to grow SKLZ’s market cap by 4x, then he will receive 3 tranches (12.09M PRU’s). However, if the market cap multiple is a fractional number like 4.2x, then Andrew will receive 20% of the 4th tranche, which would equate to an additional 805,977 shares (above the 4x multiple). I think this is good news for shareholders as Andrew is heavily incentivized to pump the share price and keep it there for 60 consecutive days (which is part of the arrangement). It will be interesting to see what Andrew and SKLZ do over the course of the next year to achieve this, and it should be very beneficial for shareholders. This plan was also mentioned with some additional details in my original analysis found here. Appointment of an Officer 8-K: On September 23rd, 2021, SKLZ appointed Stanley Mbugua as the Chief Accounting Officer (CAO) to start on September 27th 2021. Prior to joining SKLZ, Mr. Mbugua was VP & CAO of Rimini Street, which is an enterprise software company, for 4 years. Prior to this Mr. Mbugua was the Senior Director and Corporate Controller at Lattice Semiconductor for 2 years. Mr. Mbugua is eligible to receive up to $400,000 annually and is eligible for a $1.5M award over the next 3.25 years. Mr. Mbugua’s salary will be $300,000/year, and he is eligible for a $100,000/year bonus if he is able to reach his performance goals for the year. Furthermore, Mr. Mbugua is eligible for $375,000 (25%) on the 1st anniversary of his start date, and 12 quarterly payments of $93,750 thereafter as part of his “RSU award”. SKLZ recently released their SEC Form 3, which shows that the shares pertaining to Mr. Mbugua’s 25% RSU award (for 1st anniversary” have been granted but are awaiting vesting (on September 27th 2022). Recent News: Big Buck Hunters Release: On September 23rd, 2021, SKLZ announced the release of “Big Buck Hunters” on their gaming platform, and for their eSports tournaments. SKLZ released Big Buck Hunters: Marksman” on their platform, which is their first ever first-person-shooter (FPS) game. This is important because SKLZ’s CEO Andrew Paradise has announced his willingness to expand into FPS games, and this is their first move into doing so. This genre of gaming is wildly popular and has a dedicated and active fan base, which can translate into tremendous sales if SKLZ is able to create a breakthrough FPS game in the future. Since their release of this game on IOS, they have already ranked #3 in the App Store for “Popular Sports Apps”. SKLZ Workplace Awards: On August 4th, 2021, SKLZ was named one of “Fast Company’s” 100 best workplaces for innovators. SKLZ managed to crack #37 on this list, which is pretty high, and they are joined by the likes of Google, Moderna, Samsung, and General Electric. All of the companies that made this list are said to have “created and sustained cultures of innovation, even in remote work environments”. This comes just months after SKLZ was awarded “The Best Place to Work” by both The San Francisco Business Times, and The Silicon Valley Business Journal. Both of these publications stated that SKLZZ is known for recruiting and retaining the best and the brightest talent”. These awards are very good for the company as it should help them to attract top talent and retain their current talent. Furthermore, people who are happy at work and are in good work environments can be more productive workers. Expansion into India: SKLZ has talked about their plans to expand into India for the better part of a year. In a recent interview with CNBC, Andrew Paradise stated that they are looking to expand into the Indian gaming market by Q4 of this year (2021). This is big news as KPMG has estimated that the Indian gaming market is expected to grow by 113% over the next 3 years (by 2025). Furthermore, KPMG expects the online and mobile gaming segments to grow the quickest (182% over the next 3 years). This explosive growth represents a huge opportunity for SKLZ in India, and if they are able to penetrate even a small percentage of this market it could be lucrative for their share price. Potential explanations for the 60% decrease in share price: In this section, I will explain factors that contributed to SKLZ’s declining share price that I mentioned in my previous analysis, as well as factors that I did not mention in the analysis that had negative effects on their share price. Financial Performance: SKLZ’s Q2 financial report had some upsides and some downsides. However, I found that the downsides outweighed the upsides for the following reason. SKLZ’s net loss increased by 300% YoY which is terrible, and signals that they are moving in the wrong direction. Furthermore, their Adjusted EBITDA fell by over $28M YoY, which is again not a good look. Although SKLZ has increased revenues greatly over the past year, they have not been able to convert that into a better bottom line, which is why investors are panicking and selling off their positions. I say they are moving in the wrong direction as a result of their previous earnings reports. From 2018 to 2019 SKLZ was able to decrease their net losses, which got investors excited that they were making their way towards profitability. However, over the past 2 years (2020 and TTM) SKLZ’s net loss has grown by a factor of 10x. SKLZ performance in the net loss category over the past 2 years is one of the leading financial related reasons why investors are exiting their positions. Inflation Data (and 10-Year Treasury Yields): Since I posted this analysis in June of 2021, the high rate of inflation (5.4%) has persisted over the past 4 months. These high levels of inflation are not good for hyper growth stocks like SKLZ. Furthermore, during this same timeframe the US 10-Year Yield increased from 1.489% to 1.518%, which is also not good for SKLZ. The reason that increasing yields/inflation are bad for hyper growth stocks is the fact that these rates are incorporated in the WACC, which is used to discount future cash flows. If the discount rate is higher (which is the case with a higher 10-Year Yield), than todays share value based on future cash flow would decrease as a result of todays money becoming less valuable. Dilution: In my previous analysis, I highlighted the fact that SKLZ has a variety of ways in which they can dilute their stock. However, recently their redemption of public warrants has caused large dilution and have caused investors to panic. The redemption of these warrants in combination with their other forms of share dilution have all led to the decrease in SKLZ’s share price. Short Sellers and Cathy Wood: This is one of the factors that I did not mention in my previous analysis. Earlier this year there were 2 short-seller reports that were published, claiming that SKLZ was covering up revenue losses on their top 3 games, and that they falsified their revenues. This triggered several lawsuits and hurt SKLZ’s share price. These reports came out before I posted my analysis, however they have had longer term effects on the share price and was one of the reasons why SKLZ was down so much in July. Another reason for their decrease in July can be attributed to Cathy Wood selling a somewhat large portion of her SKLZ holdings. In July Cathy sold over 1M shares which represented nearly 16% of her total holdings in SKLZ. The reason that this had such a large influence on the share price of SKLZ is because it initially gained popularity via Cathy and her conviction of the stock. However, many investors saw this sale as Cathy not believing in it anymore, which caused them to exit their position(s). Final Thoughts: I think that SKLZ is headed in the right direction when looking at their recent partnerships, investments, and buyouts. I think that their strategies behind these moves (and their possible expansion into India) can serve their business very well, and set them up for future success, however, there are some current factors (like their dilution and financial shortcomings) that have restricted their share price from showing these successes. In terms of a valuation, I would have to use the same valuation that I achieved through my comparable analysis in my original analysis, which found the fair value for $SKLZ to be $25.31. There are some flaws with this valuation, and there is more to be added, however I stick by my original valuation and think that there is a potential reversal coming in the next couple of months.

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SKLZ Stock Analysis: A much needed update

bullish

$SKLZ Investment Update:

Hello all,

It has been nearly 4 months since I first posted my analysis of $$KLZ. Since then, this investment idea has done terribly and is currently down 62%. This update post will help you to understand why this position has performed poorly over the past couple months. Furthermore, this update will provide recent news and events that can help $SKLZ to turn around, and potentially reach my target price set out in my original analysis (found here).

Recent SEC Filings:

Over the past couple of months there have been a tremendous number of filings between SKLZ and the SEC, however, I have narrowed down these filings by finding/presenting you with the 3 most important filings over the past 4 months.

Q2 2021 Financial Report (10-Q):

On August 3rd, 2021, SKLZ released their Q2 2021 earnings report, which had some points that I would like to highlight in this section.

Firstly, SKLZ reported their 22nd quarter of consecutive growth, this is expected as it is a young, high-growth prospect, however their growth rate is very high. SKLZ was able to grow their revenues and profits by a factor of 52%, however they reported a greater net loss, and lower EBITDA. Overall, there is a lot of revenue growth however none of this growth is being transferred into SKLZ pockets, which is normal for a high growth stock, but is somewhat worrying. I am looking for them t turn this trend around in the next couple quarterly reports and start to decrease their net losses or else I will exit the position.

Secondly, SKLZ acquired Aarki in July of 2021. Aarki is a demand-side marketing platform that has 465M active monthly users, data engines, and machine-learning algorithms that deliver high ROI to their advertising customers. This acquisition is very strategic and can help SKLZ to acquire users and monetize their platform more efficiently. This should help to drive in more revenues for both Aarki and Skillz.

Additionally, SKLZ entered into a strategic partnership with “Exit Games”, in which they agreed to purchase a $50M minority stake in Exit Games. Exit Games is a German company that allows developers to create and host real-time multiplayer games (like SKLZ). This deal gives SKLZ the access/rights they need in order to use Exit Games’ technology to accelerate SKLZ’s multiplayer game growth, and for SKLZ to use in their eSports tournaments/platforms.

Lastly, SKLZ announced their partnership with the NFL for NFL-branded mobile games. Currently there are 14 NFL-branded games being developed and SKLZ plans to choose just 3 of them to launch in 2022 or early 2023.

Registration of Securities (S-1):

On August 16th, 2021, SKLZ submitted/completed their S-1 filing, which means that they registered more Class A common shares. In this filing, SKLZ noted that they registered 4,401,615 shares at an offering price of $11.88, which diluted previously held shares by roughly 1%. These shares were granted to SKLZ CEO (Andrew Paradise) as a result of their “2020 Omnibus Incentive Plan”.

CEO Compensation (Omnibus Incentive Plan) 8-K:

On September 14th, 2021, SKLZ announced that they granted (not vested) Andrew Paradise a total of 16,119,540 Performance Stock Units (PSU’s) to be earned over the next year. Each PSU can be vested for 1 Class A common stock and is a part of SKLZ’s “2021 Omnibus Incentive Plan”. The 2021 and 2020 Incentive plans are nearly identical and follow the following framework.

This plan outlines the total compensation available for Andrew if he meets certain performance thresholds. The total compensation (16.12M shares) is divided equally into 4 tranches (think of a tranche, the same way you think of slices of a pie), each containing 4,029,885 PRU’s. Each of these tranches is unlocked when Andrew (and the company (SKLZ)) meet certain performance measures.

These tranches are unlocked after a SKLZ market cap reaches a certain multiple during the timeframe. The 4 performance milestones are 2x, 3x, 4x, and 5x. If Andrew is able to grow SKLZ’s market cap by 4x, then he will receive 3 tranches (12.09M PRU’s).

However, if the market cap multiple is a fractional number like 4.2x, then Andrew will receive 20% of the 4th tranche, which would equate to an additional 805,977 shares (above the 4x multiple).

I think this is good news for shareholders as Andrew is heavily incentivized to pump the share price and keep it there for 60 consecutive days (which is part of the arrangement). It will be interesting to see what Andrew and SKLZ do over the course of the next year to achieve this, and it should be very beneficial for shareholders.

This plan was also mentioned with some additional details in my original analysis found here.

Appointment of an Officer 8-K:

On September 23rd, 2021, SKLZ appointed Stanley Mbugua as the Chief Accounting Officer (CAO) to start on September 27th 2021. Prior to joining SKLZ, Mr. Mbugua was VP & CAO of Rimini Street, which is an enterprise software company, for 4 years. Prior to this Mr. Mbugua was the Senior Director and Corporate Controller at Lattice Semiconductor for 2 years.

Mr. Mbugua is eligible to receive up to $400,000 annually and is eligible for a $1.5M award over the next 3.25 years. Mr. Mbugua’s salary will be $300,000/year, and he is eligible for a $100,000/year bonus if he is able to reach his performance goals for the year.

Furthermore, Mr. Mbugua is eligible for $375,000 (25%) on the 1st anniversary of his start date, and 12 quarterly payments of $93,750 thereafter as part of his “RSU award”.

SKLZ recently released their SEC Form 3, which shows that the shares pertaining to Mr. Mbugua’s 25% RSU award (for 1st anniversary” have been granted but are awaiting vesting (on September 27th 2022).

Recent News:

Big Buck Hunters Release:

On September 23rd, 2021, SKLZ announced the release of “Big Buck Hunters” on their gaming platform, and for their eSports tournaments. SKLZ released Big Buck Hunters: Marksman” on their platform, which is their first ever first-person-shooter (FPS) game. This is important because SKLZ’s CEO Andrew Paradise has announced his willingness to expand into FPS games, and this is their first move into doing so. This genre of gaming is wildly popular and has a dedicated and active fan base, which can translate into tremendous sales if SKLZ is able to create a breakthrough FPS game in the future.

Since their release of this game on IOS, they have already ranked #3 in the App Store for “Popular Sports Apps”.

SKLZ Workplace Awards:

On August 4th, 2021, SKLZ was named one of “Fast Company’s” 100 best workplaces for innovators. SKLZ managed to crack #37 on this list, which is pretty high, and they are joined by the likes of Google, Moderna, Samsung, and General Electric. All of the companies that made this list are said to have “created and sustained cultures of innovation, even in remote work environments”.

This comes just months after SKLZ was awarded “The Best Place to Work” by both The San Francisco Business Times, and The Silicon Valley Business Journal. Both of these publications stated that SKLZZ is known for recruiting and retaining the best and the brightest talent”.

These awards are very good for the company as it should help them to attract top talent and retain their current talent. Furthermore, people who are happy at work and are in good work environments can be more productive workers.

Expansion into India:

SKLZ has talked about their plans to expand into India for the better part of a year. In a recent interview with CNBC, Andrew Paradise stated that they are looking to expand into the Indian gaming market by Q4 of this year (2021). This is big news as KPMG has estimated that the Indian gaming market is expected to grow by 113% over the next 3 years (by 2025). Furthermore, KPMG expects the online and mobile gaming segments to grow the quickest (182% over the next 3 years). This explosive growth represents a huge opportunity for SKLZ in India, and if they are able to penetrate even a small percentage of this market it could be lucrative for their share price.

Potential explanations for the 60% decrease in share price:

In this section, I will explain factors that contributed to SKLZ’s declining share price that I mentioned in my previous analysis, as well as factors that I did not mention in the analysis that had negative effects on their share price.

Financial Performance:

SKLZ’s Q2 financial report had some upsides and some downsides. However, I found that the downsides outweighed the upsides for the following reason.

SKLZ’s net loss increased by 300% YoY which is terrible, and signals that they are moving in the wrong direction. Furthermore, their Adjusted EBITDA fell by over $28M YoY, which is again not a good look. Although SKLZ has increased revenues greatly over the past year, they have not been able to convert that into a better bottom line, which is why investors are panicking and selling off their positions.

I say they are moving in the wrong direction as a result of their previous earnings reports. From 2018 to 2019 SKLZ was able to decrease their net losses, which got investors excited that they were making their way towards profitability. However, over the past 2 years (2020 and TTM) SKLZ’s net loss has grown by a factor of 10x. SKLZ performance in the net loss category over the past 2 years is one of the leading financial related reasons why investors are exiting their positions.

Inflation Data (and 10-Year Treasury Yields):

Since I posted this analysis in June of 2021, the high rate of inflation (5.4%) has persisted over the past 4 months. These high levels of inflation are not good for hyper growth stocks like SKLZ. Furthermore, during this same timeframe the US 10-Year Yield increased from 1.489% to 1.518%, which is also not good for SKLZ.

The reason that increasing yields/inflation are bad for hyper growth stocks is the fact that these rates are incorporated in the WACC, which is used to discount future cash flows. If the discount rate is higher (which is the case with a higher 10-Year Yield), than todays share value based on future cash flow would decrease as a result of todays money becoming less valuable.

Dilution:

In my previous analysis, I highlighted the fact that SKLZ has a variety of ways in which they can dilute their stock. However, recently their redemption of public warrants has caused large dilution and have caused investors to panic. The redemption of these warrants in combination with their other forms of share dilution have all led to the decrease in SKLZ’s share price.

Short Sellers and Cathy Wood:

This is one of the factors that I did not mention in my previous analysis. Earlier this year there were 2 short-seller reports that were published, claiming that SKLZ was covering up revenue losses on their top 3 games, and that they falsified their revenues. This triggered several lawsuits and hurt SKLZ’s share price.

These reports came out before I posted my analysis, however they have had longer term effects on the share price and was one of the reasons why SKLZ was down so much in July.

Another reason for their decrease in July can be attributed to Cathy Wood selling a somewhat large portion of her SKLZ holdings. In July Cathy sold over 1M shares which represented nearly 16% of her total holdings in SKLZ. The reason that this had such a large influence on the share price of SKLZ is because it initially gained popularity via Cathy and her conviction of the stock. However, many investors saw this sale as Cathy not believing in it anymore, which caused them to exit their position(s).

Final Thoughts:

I think that SKLZ is headed in the right direction when looking at their recent partnerships, investments, and buyouts. I think that their strategies behind these moves (and their possible expansion into India) can serve their business very well, and set them up for future success, however, there are some current factors (like their dilution and financial shortcomings) that have restricted their share price from showing these successes.

In terms of a valuation, I would have to use the same valuation that I achieved through my comparable analysis in my original analysis, which found the fair value for $SKLZ to be $25.31. There are some flaws with this valuation, and there is more to be added, however I stick by my original valuation and think that there is a potential reversal coming in the next couple of months.

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9 min

10.00

Target Price

9/ 10

Confidence

1-3 Years

Timeframe
Share
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Earnings Release
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News
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SEC Filing
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Sentiment
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