The Valuation of Skillz Stock Remains Excessive

Stocks to sell

Skillz  (NYSE:SKLZ) stock appears to have climbed recently due to takeover speculation and a boost from Reddit traders.

A row of people wearing matching outfits and headsets play a video game together in a room with blue lighting.

Source: NYCStock / Shutterstock.com

But I believe that the takeover speculation is likely unwarranted, while SKLZ stock remains extremely overvalued.

An Unrealistic Takeover Rumor

A publication called CTFN suggested that a casino could look to buy Skillz because there has been “consolidation… between casinos and online gaming,” Seeking Alpha reported.

Skillz, however, does not feature gambling or emphasize games that gamblers traditionally enjoy such as poker, craps, or blackjack. It does appear to have a blackjack game and a poker game, but they aren’t a big part of  Skillz’s offerings.

As Casino.org explained in an Aug. 2 article, “The bulk of the games featured on Skillz aren’t traditional casino fare, such as blackjack, craps, or poker.”

And its  tournaments with cash prizes involve traditional videogames, rather than traditional gambling games.

Given these points, it’s obvious that most of Skillz’s customer base are probably fans of traditional video games. Casinos and companies that feature traditional gambling games online (known as iGaming) are targeting different types of consumers.

Specifically, they’re seeking consumers who enjoy the  traditional gambling games, whether online or in-person or both. That’s why DraftKings (NASDAQ:DKNG), in an effort to expand  its iGaming offerings, bought Golden Nugget (NASDAQ:GNOG), which owns many casinos and an online gambling site. That’s why MGM (NYSE:MGM) launched a joint venture called BetMGM, which specializes in iGaming and sports gambling.

Skillz has very limited iGaming infrastructure, and it caters to fans of traditional videogames, not lovers of iGaming and sports betting.  Therefore, it would make no sense for a company that specializes in iGaming, operating brick-and-mortar casinos, and/or sports betting to buy Skillz.

The Valuation of SKLZ Stock Is Still Very High

Skillz is changing hands for nearly 13 times analysts’ average 2021 top-line estimate for the company. I’ve heard value investors say that stocks which are trading at ten-times revenue  are too expensive.

I believe that, if a company is growing explosively, has a huge addressable market, is moving towards profitability, and has great disruptive potential, ten or even 20 times revenue could be a worthwhile price to pay for long-term, growth investors.

But as far as I can tell, Skillz does not have any of these attributes.

In Q2, its top line climbed 52% year-over-year. I think that’s impressive growth, but I wouldn’t call it explosive. As I’ve pointed out in other columns, many video games now have online multiplayer options, giving Skillz plenty of competition, and there are signs that eSports, which appears to be the main area in which Skillz has a strong competitive advantage, is not a very large market. Finally, the company’s EBITDA, excluding certain items, dropped $283 million YOY last quarter, falling to -$31.6 million.

Other Points to Weigh

There are concrete signs that the popularity of video games is waning as economies reopen. For example, Take-Two Interactive (NASDAQ:TTWO) recently provided a lower-than-expected Q2 bookings estimate, causing its stock to fall sharply. 

And in July, video game sales rose just 10% YOY. I wouldn’t call that impressive or explosive growth.

Finally,  I’ve predicted for a couple of months that meme stocks would weaken. Although some meme stocks have been making a bit of a comeback in recent weeks,  many, if not, most of them are already down a great deal from their recent highs. For example, SKLZ stock itself has fallen to around $12, versus its July 28 high of around $14.70.

I continue to expect most meme stocks to weaken over the longer term.

The Bottom Line on SKLZ Stock

The takeover speculation about Skillz is unrealistic, while the company does not have any of the characteristics that a good, highly valued growth stock should have. What’s more, it’s facing a number of important macro challenges.

In light of these points, I continue to recommend selling SKLZ stock.

On the date of publication, Larry Ramer held a long position in MGM stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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