The digital gaming space is one that’s red-hot right now, and for good reason. Investors want exposure to stocks with outsized growth potential over the long-term. For investors looking at this space, Skillz (SKLZ) has become one of the go-to stocks today. Since the company’s reverse SPAC merger at the end of last year, SKLZ stock has been on a bumpy ride. The mobile gaming stock peaked at more than $46 earlier this year amid de-SPAC and SPAC hysteria, before settling down of late.

Currently, shares of SKLZ stock can be bought at around the $20 level. That’s not bad, considering the levels to which other de-SPAC companies have dipped of late. This level also represents a strong recovery from the $12.50 range the stock had approached in April/May. (See Skillz stock charts on TipRanks)

Whether this momentum can continue is the key question on the minds of many investors right now. Let’s take a look at what’s going right with Skillz, and what the risks are for investors who are intrigued by this digital gaming stock.

Strong Momentum Boosted by Core Business Model

Skillz’s platform is intriguing in that this company provides and produces digital games, but does so in a pay-to-play platform. Users can compete against each other for cash prizes, and Skillz takes a cut of each contest/game.

In a way, Skillz can be compared to a casino, or more accurately a poker room, in that it takes a rake off of every “pot.” The company’s sky-high gross margins of 95% speak to the amount of operating leverage with this platform. Indeed, profitable growth is something investors should like.

While the company is still losing a ton of money, there are expectations that the growth this business could see could outweigh these short-term losses. For patient investors who believe in the model (and the margins) Skillz provides, this seems like a safe bet. The company’s recent deal with the National Football League (NFL) has brought more attention to the Skillz platform of late. Indeed, if the company can leverage this partnership using its existing platform in a way that creates immense user growth, perhaps its valuation can be justified.

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Additionally, more credence has been given to this stock of late, following the company’s inclusion in the Russell 3000 Index. More capital flows (discretionary or not) into any stock is a good thing.

That said, let’s take a look at some of the risk factors investors ought to consider with Skillz right now.

Valuation Concerns Among the Key Risks for SKLZ

At a ttm price-sales ratio of 29, Skillz is one heck of an expensive stock. Yes, this company’s near-triple-digit revenue growth rate is impressive. However, some investors have called attention to just how steeply valued this company is, relative to other options in the market. Some of this sentiment has to do with a bearish report released in March which calls Skillz’s growth rate “farcical” and highlights various concerns with how the company has been reporting its revenue.

It appears these concerns have somewhat blown over recently. However, investors ought to remember that such hyper-growth plays could remain volatile in this current environment. If inflation or other factors drive interest rates higher, valuation multiples could see some contraction. For stocks priced as highly as Skillz, this would not be a good thing for investors.

What Analysts Are Saying About SKLZ Stock

According to TipRanks’ analyst rating consensus, SKLZ stock comes in as a Moderate Buy. Out of 5 analyst ratings, there are 3 Buy recommendations and 2 Hold recommendations.

As for price targets, the average Skillz price target is $24.50. Analyst price targets range from a low of $17.00 per share to a high of $34.00 per share.

Bottom Line

Skillz remains a polarizing stock in the world of growth investors right now. On the one hand, short sellers are looking to make hay with this stock. Indeed, the company’s short interest ratio of 27% is high. There are reasons many investors view this stock as simply uninvestable right now.

On the other hand, other growth thought leaders such as Cathie Wood are all aboard the Skillz train. Ms. Wood has been an avid buyer of SKLZ stock throughout this turmoil.

Which camp is ultimately proven right remains to be seen. However, for now, it appears SKLZ stock is likely to remain volatile for some time as the market continues to conduct price discovery on this name.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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