For multiple reasons, I believe that Skillz (NYSE:SKLZ) stock looks to be meaningfully overvalued at its current levels. Therefore, I recommend that investors sell this name.
I’m not at all convinced that the popularity of esports in the U.S. will ever become strong enough to come close to supporting the current, high valuation of SKLZ stock, and I’m not sure to what extent the company will be able to penetrate overseas markets.
Finally, a recent short seller’s report on the stock makes me more wary of it, and I believe that the company’s competition, in the U.S. and overseas, could greatly intensify in the coming years.
Esports Don’t Appear to Be That Popular
Skillz seems to be focusing largely on the esports market, which refers to video-game tournaments that are shown online or on old-fashioned TV. In his letter on Seeking Alpha, Skillz CEO Andrew Paradise wrote that, “We built Skillz on the premise of leveling the playing field, of creating esports for everyone.”
Two data points have left me doubtful about the extent of esports’ popularity. Specifically, in the first quarter of 2020, 3.1 billion hours of esports were viewed in Amazon’s (NASDAQ:AMZN) Twitch system. Twitch appears to be available nearly worldwide, so 3.1 billion hours over three months doesn’t strike me as very impressive.
Indeed, the following calculations suggest that it’s not as much as it sounds. Those hours work out to around 250 million hours per week. To put that in perspective, four NFL divisional playoff games, which are mostly viewed only in the U.S., had an average of 30.63 million viewers one weekend last January. Assuming that each game lasted for an average of three hours, that equates to 367.2 million hours.
And my educated guess would be that the average income of U.S. NFL viewers, many of whom likely tend to be middle age and elderly adults, is much higher than the average disposable income of global esports users, many of whom likely live in much poorer countries (China is the world’s leading country for esports) and are probably well under the age of 18. Viewers or participants with lower disposable incomes, of course, are less attractive to advertisers and less likely to be able to pay significant user and/or viewing fees.
Finally, according to a Statista report issued in March 2021, esports generated $957 million of revenue in 2019 and was slated to reach $1.084 billion of revenue this year and $1.6 billion in 2024. That means that, even if Skillz is able to obtain 15% of all projected global esports revenue in 2024, its total sales would come in at $240 million. That’s not very high, considering its stock now has a market capitalization of around $6.8 billion, according to Yahoo Finance.
Competition and Overseas Markets
Although I don’t know a great deal about modern video games, I do know that many video game systems enable multiple people to play games online with others. Therefore, I think that it would not be incredibly difficult for sizeable companies to start broadcasting esports tournaments if their popularity increases tremendously. As a result, if esports’ revenue growth does accelerate wildly beyond expectations, Skillz will likely have to face some very tough competition.
Meanwhile, I’m sure that, in most other countries in which esports is very popular, fairly strong companies are already broadcasting them.
And finally, the record of American consumer companies overseas is fairly good but somewhat mixed. Netflix (NASDAQ:NFLX) and McDonald’s (NYSE:MCD) have done very well overseas, for example, but Amazon has struggled in India, the NFL did not do very well in Europe and Starbucks (NASDAQ:SBUX) could not survive in Israel. Therefore, it’s hard, if not impossible, to predict how Skillz, with its relatively new business, will do in foreign countries.
A Short Seller’s Report
In my experience, short sellers’ reports more often than not have some truth in them. Therefore, the recent report on SKLZ stock by Wolfpack Research is worrisome.
Among other things, the firm says that the company’s revenue outlook is “entirely unrealistic” and alleges that its most popular games seem “”stagnant to declining.” Skillz countered that Wolfpack had made “numerous errors and misleading statements.”
The Bottom Line on SKLZ Stock
The esports market does not appear to be very large, and Skillz could face tough competition in the U.S. and overseas. It’s uncertain whether Skillz will be successful overseas, and the short seller’s report is concerning.
Moreover, according to Yahoo Finance, the shares are changing hands for around 11.8x analysts’ average 2022 revenue estimate, the company is far from profitability, and Wall Street is currently bearish on “stay-at-home” stocks. Given these points, SKLZ stock is definitely a sell.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
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.