SKLZ Stock is Taking Off: Is It a Buy Right Now?

© Reuters. SKLZ Stock is Taking Off: Is It a Buy Right Now?

The stock of mobile gaming platform provider Skillz (SKLZ) has seen significant volatility throughout this current year. Shares of the company soared to the $46 level earlier this year, during the previous meme rally. However, since then, investors have seen a tremendous amount of value lost. Shares of Skillz stock can now be picked up for around $11 apiece.

Like many analysts on SKLZ stock, I'm neutral on this mobile gaming play. Sure, the potential upside with this stock is tremendous. However, the risk-reward outlook for Skillz is mixed right now.

Why's that?

Well, Skillz has been embroiled in various fights with short sellers and those questioning the company's corporate governance. Various allegations have been put forward, suggesting that Skillz' business model, revenue recognition, and other factors are questionable.

Since these concerns arose, Skillz has seen some rather bearish momentum take hold. Until this negative pattern of momentum is broken, it's hard to make the case to own this hyper-growth stock right now.

However, there are also reasons to put this stock on one's watch list. If momentum turns around, anything's possible (as we saw earlier this year).

Let's dive into why Skillz could be an intriguing stock to watch from here.(See Skillz stock charts on TipRanks)

Skillz Stock: A Potential Short Squeeze Candidate

Sure, many of the allegations made against Skillz are concerning to investors. Indeed, it's important for investors to consider all aspects of any investment before jumping in.

However, it turns out that the fact that SKLZ stock is so heavily shorted could work in its favor. Retail investors have transformed the broader investment landscape this year. Indeed, whether this change is permanent or temporary remains to be seen.

On the other hand, we've seen stocks like Skillz that have been beaten down by short sellers rally in parabolic fashion. There's a reason why SKLZ stock has trended on social media in recent weeks. This is a potential short squeeze candidate many speculators may feel content jumping on at near its SPAC IPO price.

Now, buying a stock because one thinks others will as well is a risky proposition. The company's short interest and borrow fee rate certainly suggest a squeeze could happen. However, whether one materializes or not is the real question.

Right now, there's a tremendous amount of negative momentum with this stock. Anything's possible these days, and short squeeze hopefuls may be proven right. However, this is a tricky stock to time, and one best reserved for day traders to play, given its volatility.

Company Fundamentals Improving

Moving away from the technical elements that may move SKLZ stock, the company's fundamentals look decent.

Skillz recorded revenue of $89.49 million for the second quarter, which represents a massive 52% year-over-year jump. The company's profit also touched $85.1 million, further indicating financial improvement. Skillz currently provides investors with a massive 95% margin.

On the face of it, these numbers suggest Skillz could be a great turnaround stock. If the company can continue to grow its top line rapidly, perhaps fundamental growth investors will jump into this stock.

However, Skillz is still losing a lot of money. The company's net loss nearly quadrupled to $79.8 million from $20.2 million a year ago. Additionally, mostly active users have fallen off. Perhaps this is a result of the pandemic reopening hurting mobile gaming interest. However, these results pose a mixed bag for investors.

Top line growth is great. However, many investors are looking for growth stocks with the best-quality reports in recent quarters. Companies that don't show a meaningful path to profitable growth are increasingly being looked down upon by investors. Indeed, it appears SKLZ stock is currently in this grouping.

Acquisitions and Partnerships to Boost Skillz

Skillz recently acquired Aarki as a way to improve engagement among users. Through this merger, Skillz hopes to utilize AI and big data capabilities to enhance its offering and improve its performance. The company expects to add incremental revenue of $13 million off the bat as a result of the deal.

Additionally, Skillz announced a partnership with German company Exit Games. This company excels in hosting esports tournaments, a potential area of vertical expansion for Skillz.

These partnerships and deals are on top of an already high-profile partnership deal with the NFL, which has bullish investors excited about the long-term prospects of SKLZ stock.

Indeed, this company is a mover and a shaker. Investors have reason to be bullish on this stock from a growth perspective. However, if it comes down to the numbers, as it appears it has for many investors, the investment decision in SKLZ stock isn't as clear as it perhaps was earlier this year.

Wall Street’s Take

As per TipRanks' analyst rating consensus, Skillz stock is a Moderate Buy. Out of 5 analyst ratings, there are 3 Buy recommendations and 2 Hold recommendations.

The average SKLZ price target is $19 per share, implying an upside of 69.50%. Analyst price targets range from a high of $25 per share to a low of $15 per share.

Bottom Line

The fact that Skillz is currently losing so much money puts this stock in a difficult position. The potential for capital raises in the future raises concerns about this stock's existing valuation.

On the other hand, if Skillz can turn things around and show a profit in the coming year, perhaps there's a real turnaround thesis. Shorter-term, there's also short squeeze potential with this stock.

Accordingly, it's probably safe to view this stock as a highly speculative pick for only the most aggressive investors. Those banking on consistent growth may want to look elsewhere right now.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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