Savvy investors typically grasp the crucial factors that move a stock price. Those factors vary from business to business. For instance, the cost of crude oil may be a vital factor for an airline company. Similarly, total daily active users is a crucial metric for social media stocks.
1. Skillz is spending aggressively on sales and marketing
Those following Skillz know that management likes to spend aggressively on sales and marketing. In the 12 months ended Dec. 31, Skillz spent 121% of revenue on this line of the income statement. That wasn’t the first time it spent more on marketing than it earned in sales. In the year ended Dec. 31, 2020, it spent 110% of revenue on sales and marketing.
In absolute sums, the investments in sales and marketing totaled $252 million in 2020 and $384 million in 2021. You would expect Skillz to get incredible returns on that investment that convinces it to boost spending. Unfortunately, that hasn’t been the case.
Paying monthly active users increased by 59.4% to 510,000 accounts as of Dec. 31, up from 320,000 at the same time the previous year. Meanwhile, spending on sales and marketing increased by 52.4% year over year.
2. Skillz is a unique gaming company
Interestingly, players on Skillz have the opportunity to wager on the outcome of their multiplayer games. That inherently makes gameplay more fun because there are tangible rewards for winning and monetary consequences for losing. Furthermore, because Skillz ensures that the games on its platform are based on skill rather than chance, it is not regulated as a gambling company.
Skillz has developed an algorithm that matches players based on skill level to keep games balanced. That way, players are not frustrated by encountering far superior opponents. However, a challenge in this system is that it requires a broad player base. Otherwise, it may cause friction in starting new games when players need to wait for long periods to find a match.
3. Skillz outsources game development
Another essential fact about Skillz is that it outsources game development. The company does not spend money creating any of the games on its platform. Instead, it promises developers a percentage of their creations’ revenue on the Skillz platform.
The business model is similar to another gaming company, Roblox, which does not create the experiences on its platform either. The big difference is that Roblox has effectively attracted developers to its platform while Skillz has trouble onboarding new and exciting creations.
Of course, one cause for that could be Skillz’s relatively small size. With only 500,000 paying monthly active users, it pales compared to Roblox’s over 50 million daily active users. The smaller scale means less potential revenue for developers who would allocate their time to more lucrative opportunities.
Overall, the first fact about Skillz is taking the most prominent role in moving the stock lately. Skillz is down an incredible 92.7% off its highs as management persistently spends aggressively on sales and marketing with mediocre returns.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.