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Skillz: Game Not Over but Much Left to Prove

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It has been a rough period for Skillz (SKLZ) investors as shares have been on the backfoot, shedding 36% of their value over the past month. The selloff only continued following a lackluster 2Q earnings report.

While Skillz managed to eke out a slight beat on the top-line with revenue of $89.5 million, amounting to a 52% year-over-year uptick and coming in ahead of the estimates by $0.7 million, the company reported a much wider loss than expected, as GAAP EPS of -$0.21 missed by $0.12.

Wedbush’ Michael Pachter believes the “gradual reopening of the economy led to weaker shelter-in-place tailwinds and higher cost-per-install (CPI) rates.” Management has said that during the quarter these reached record-high levels.

During Q2, the company lowered user acquisition spend to mitigate the negative financial impact of rising CPI levels on profitability. However, Skillz continued to spend on driving engagement from users the company identified as more more likely to become payors. This resulted in a record-high payor conversion rate.

Looking ahead, Pachter expects the recent $50 million minority stake investment in Exit Games will help the platform expand into other gaming genres, including racing, fighting, and first-person shooter. Patcher also believes the addition of Aarki - the demand-side advertising company purchased in a $150 million deal and anticipated to close in Q3 - can “drive margin improvement if it can lift return on user acquisition marketing spend.”

Finally, the analyst also reiterated his belief that “parabolic upside,” could be in the cards, if the company could add to the platform a single high-profile game like Activision’s Candy Crush. However, “visibility into this specific killer app remains murky.”

“As a result,” the analyst summed up, “We now agree with investors that expect the company to demonstrate traction before bidding up the shares, and we think that a more modest multiple is appropriate.”

Accordingly, Pachter lowered the price target from $34 to $25. However, following the shares’ weakness, the new figure still suggests upside of a hefty 106% over the next 12 months. Pachter's rating stays an Outperform (i.e., Buy). (To watch Pachter’s track record, click here)

Turning now to the rest of the Street, where the one-year average price target is a more modest $20.9, yet the figure is still set to reward investors with handsome returns of 72%. Overall, the stock has a Moderate Buy consensus rating, based on 3 Buys vs. 2 Holds. (See Skillz stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.