Stocks to buy

Skillz Stock is a Cautious Buy After Last Month’s Selloff

Down nearly 46% in the past month, investors may wonder about the best move with Skillz (NYSE:SKLZ) stock. Should you stay away until it’s clear the dust has settled? Or should you “buy the dip” with this mobile gaming play? Cautious investors, wary of the deflating interest in this stock, may opt for the former. But, those taking a closer view at this company, may go with the latter.

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Why? “Story stocks” like this one may have been hammered hard in recent weeks.

Yet, this panic among investors does little to change this company’s long-term prospects. On the right side of changing trends in the world of mobile gaming, there’s tremendous growth ahead for Skillz.

Still scaling up, don’t expect it to become profitable within the next year or two. But, once it does scale up, and becomes a high-margin cash cow business, today’s valuation (market capitalization of around $5.8 billion) may look like a steal in hindsight.

Admittedly, we may see more short-term volatility, if recent negative factors (such as dilution and insider selling) continue. Even so, this company, still in its early stages, still stands to end becoming a long-term winner.

Despite Selloff, Big Potential Remains With SKLZ Stock

A few months back, when the importance of hype for a stock’s performance was at its highest, shares in Skillz may have gotten a bit overheated. After going public via a SPAC (special purpose acquisition company) merger, many expected this to “go to the moon,” as many SPAC stocks had done in 2020. But, following its aforementioned nearly 46% decline in the past month, and its around 65.5% pullback since February, shares today may be oversold at around $15 per share.

How so? As detailed in its investor presentation, the company’s position as a platform for tournament-based mobile gaming puts it in the right place, at the right time. For years, the $86 billion per year mobile gaming industry has been built around the ad-supported and in-game purchase models. But, that’s fast changing. The tournament-based revenue model, which platforms like this one support, offer greater financial rewards for mobile game developers.

This rapid shift toward the tournament-based, or esports model, is key in InvestorPlace Senior Investment Analyst Luke Lango’s recent bullish take on the stock. Already a leader in this space, Skillz has the first-mover advantage. As mobile gaming moves more to an esports revenue model, this company’s impressive growth should continue in the coming years.

With the potential for it to see EBITDA margins of 30% at scale, Lango gives a price target of $50 per share for SKLZ stock. This tremendous upside more than makes up for the risk with this speculative growth story. However, while risk/return is in your favor here, we could see continued wild price movement. Be aware of these issues. But, they are hardly a deal breaker for investors taking a long-term view on the stock.

Don’t Let Near-Term Volatility Scare You Off

There may be a pathway for SKLZ stock to deliver triple-digit percentage returns over the next 12 months. But, although the stock has seen a massive selloff since February, we may see additional volatility.

As seen last month, the company’s secondary stock offering put downward pressure on shares, due to dilution concerns. Some of this offering was for new shares. But, nearly half of it was existing shares, held by insiders looking to take profit. If the company does another secondary, as a means for insiders to cash out again, this could send the stock down to lower prices.

Also, there’s the risk investors continue to take a wait-and-see approach with the company. Further reluctance to price in its future growth into the stock could also push shares down to single-digit prices. But, while these risk make this a cautious-buy rather than a bet-the-ranch situation, don’t let either one scare you away.

With so much negatively already weighing it down, we may be near the bottom. With the possibility subsequent positive developments send it back toward $20 per share and beyond, you may miss out if you’re waiting on even lower prices to enter a position.

Bottom Line: Tread Carefully

It’s going to take many years for the “story” behind this “story stock” to fully play out. But, for patient investors, the pay off could be massive. As investors again realize its potential, we could see shares make a triumphant recovery.

Sure, continued dilution/insider selling, along with valuation concerns, could push the stock to single-digit prices. But, it’s not set in stone. That’s why buying a little bit now, and adding to your position on any additional weakness, may be the best move with SKLZ stock. In the near term, shares could see some more volatility. But, in the coming years, this stock may deliver tremendous returns.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.