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At what point should a company simply wind up operations and liquidate? There comes a time when certain companies seemingly no longer have a realistic path to generating shareholder value. In such cases, the best course of affairs may simply be to close the operating business and return the remaining cash to shareholders.
Arguably, that may be the case for online gaming company Skillz (NYSE:SKLZ). Skillz is a platform that had hoped to revolutionize the online gaming space. Its idea was to allow players to engage in skill-based matches where they could win real money prizes.
The company came public via a SPAC transaction, and shares were initially very popular. Skillz attracted well-known investors such as Cathie Wood. However, Skillz always had to spend heavily to acquire new players. With a high customer acquisition cost and elevated churn rate, Skillz struggled to hone its marketing strategy. As a result, the company never reached sustainable profitability. In fact, it has lost more than $100 million every year since going public:
As the SPAC boom wound down and investors started to pay more attention to profitability and cash flow generation, the share price for Skillz collapsed. In addition to the firm’s core monetization challenges, I believe the rise of sport betting apps has poached many potential customers away from Skillz’ offering.
I last covered the company in 2022, writing that while the stock was already down tremendously, I still didn’t see any value. In fact, I would want to see shares trade down another 70% and fall well below the cash value per share to find any upside case for the stock.
Fast-forward to today, and Skillz shares are now down 68% from my prior report. As such, it’s time for a fresh look at the company, with Skillz now trading at a sharp discount to its most recently reported book value per share.
Back in 2022, Skillz was trading with the stock in the $30s (reverse split-adjusted) while book value was around $20 per share. Now, while book value has continued to decline, the stock price has fallen much more rapidly to less than $7, leaving considerable theoretical upside from the share price to book value.
Is There A Bull Case For SKLZ Stock Today?
So, is there finally a case for optimism around this beleaguered online gaming company?
There are two answers to the question.
The first is to look at the operating business which is continuing to shrink toward seeming irrelevance, and say “No, there’s no bull case here.” The company’s revenues continue to decline at a double-digit rate both annually and sequentially. This is an ugly chart:
The company’s revenues have now plunged nearly 60% from the peak. Revenues were down 38% year-over-year in the most recent quarter, suggesting that the decline isn’t anywhere near over. Furthermore, the company’s paying monthly active users figure continues to tumble, suggesting that much of the more casual part of the company’s user base is disappearing.
Skillz seemingly doesn’t have the desire to invest in unprofitable growth anymore. It has pulled back marketing spend. And without incentives to increase payouts for gamers, the player base continues to shrink.
Furthermore, the company has slashed R&D expenses 50% year-over-year to just $3 million per quarter. Analysts had already expressed concern about the relatively modest quality of the company’s gaming experiences in terms of both graphics and gameplay compared to what you might find at peer gaming companies. With Skillz slashing its R&D spend, it appears there will not be major improvements made to the company’s existing gaming ecosystem.
Skillz is trying to shrink its way to profitability, and that’s a reasonable and laudable goal. That said, with revenue already down to $150 million in 2023 and now at a less than $120 million annualized pace based on last quarter’s results, it’s hard to see what this might be worth as a steady state business as the firm is still far from breaking even on an adjusted EBITDA basis. How many more costs can the company cut and still have a viable business? At some point, it’s not worth the hassle of being a publicly traded company once a firm is small enough that listing fees, auditing, legal, and all other such costs associated with being a publicly traded company in the United States consume a meaningful chunk of top-line revenues.
Getting back to the original question, though: Is there a bull case here? Yes, there is.
That comes from the balance sheet. Skillz is trading at a sizable discount to its book value, and also its net cash per share. Specifically, Skillz had $302 million of cash and equivalents at year-end 2023, compared to $124 million of total outstanding debt. This means that Skillz has approximately $178 million of net cash available, versus a market cap of around $125 million.
The company is also engaged in a legal dispute against a rival that it believes infringed on its intellectual property. It appears that Skillz could receive a $42.9 million payout from that matter.
In theory, Skillz could suspend operations and return its cash pile plus potential legal proceeds to shareholders. This could generate a considerable return from today’s price. Alternatively, Skillz could attempt to sell its gaming platform to some other operator, while using the cash for a shareholder distribution or to go into a different line of business altogether.
If you’ve been bearish on SKLZ stock, I think that’s what you have to keep in mind. At this point, Skillz does have the option to abandon the core business and use the substantial cash reserves for more fruitful ends. However, from my reading of the latest conference call transcript, I see little indication that a business pivot is potentially on the table. And, with Skillz repurchasing stock, that will erode the company’s cash balance over time and narrow its range of strategic options.
Perhaps activist investors will come along and push the company in the direction of returning the cash to shareholders. That might be an intriguing thing for an activist shop to pursue, in fact.
In the meantime, it seems Skillz will keep trying to shrink its way to success. The company is continuing to tinker with its monetization and engagement efforts for its VIP customers, among other things, in an attempt to get more out performance out of its existing client base.
If you think the company could potentially stem the revenue decline, maybe it could get to breakeven, at least on an EBITDA basis. From there, you could argue that a breakeven business attached to a large cash balance should be worth some real upside from today’s price. That’s not enough of a bull case to get me excited, but it’s better than nothing.
On the other hand, if you had been short SKLZ stock previously, it seems like that trade is played out, and it might be time to move on. Given the large cash balance and decreasing size of the company’s operating losses, SKLZ stock may stabilize around its current share price. As long as shares are trading below cash value, there is a plausible upside scenario, and further near-term declines will be somewhat limited.
That said, Skillz serves as a reminder of the dangers of the sunk cost fallacy when it comes to investing. Skillz stock has already lost almost all its value from the 2021 peak. But as long as revenues continue to sink and the company keeps losing money, it can and in fact has further eroded shareholder value since my last article about the company.
Going forward, Skillz seems like a potential dead money situation. There is a large cash balance, but one which will be gradually eroded as the company continues to operate its thus-far unsuccessful gaming platform. The stock could trade in flat or slightly down over time as investors lose hope that something positive will eventually happen.
