Skillz Stock’s Recent Rally Is Too Little, Too Late

Stocks to sell

Skillz (NYSE:SKLZ) has been recovering from a sharp decline in recent weeks. To some, this may look like the start of a recovery for shares in the mobile gaming platform operator, but make no mistake. What has played out with SKLZ stock is little more than a dead cat bounce.

In other words, what we are seeing is a temporary recovery after a big plunge. Chances are, this recent uptick is the result of short sellers covering positions. It also may be the result of a relief rally growth stocks experienced last month, on hopes that the Federal Reserve will reverse course on interest rate hikes starting next year.

Whatever the reason though, don’t expect the uptick to last much longer. There’s a strong chance its fundamentals remain lackluster.

With this, there’s still little to suggest it has substantial room to run from here.

SKLZ Stock Is Up Despite Little Change to Its Story

When I last wrote about Skillz back in July, it was trading for around $1.23 per share. As of this writing, it’s trading for around $1.80 per share. That’s a nearly 50% jump in less than a month.

But while this big move may imply a major change has happened, that is not the case. The story with SKLZ stock is still the same. It’s struggling to change course after its initial growth strategy (heavy upfront spending) proved to be unsustainable. The company has slashed marketing expenses. It has also shifted its focus to retaining and increasing the revenue it generates from its existing user base.

Still, it’s unclear whether this new game plan will pay off. The impact of cost cutting so far has been negative. Skillz’s revenue growth, which came in at nearly 67% in 2021, is expected to decelerate to just 3.9% in 2022.

However, this big drop in revenue growth isn’t being matched with a larger reduction in operating losses. Much less, a swing to profitability. Instead, per analyst forecasts, the mobile gaming company is expected to report wider net losses per share compared to last year (79 cents, compared to 47 cents).

More Disappointment Will Challenge a Further Rebound

In the near term, market-related factors like short covering and a relief rally may have been enough to counter poor fundamentals with SKLZ stock, but that probably will not be the case on a longer timeframe.

More disappointment likely lies ahead. Why? The underwhelming forecast mentioned above for this year is based on the best case scenario for Skillz. It’s in line with the revenue guidance provided by management. The company may use metrics like adjusted EBITDA to spin that things are improving, but even under these metrics, it’s only marginally narrowing negative margins (-37% in 2022, versus -47% in 2021).

Considering the growing chance of a recession, results in the coming quarters could fall short of these already walked-back expectations. Losses (even on an adjusted EBITDA) basis, may end up being higher than the current estimates. If this happens, it will challenge a further rebound for shares.

Not only that, it may result in a move back to lower prices. Higher losses mean higher cash burn. Although the company still has a cash position totaling $484.1 million, it may have to raise more money (on dilutive terms) to shore up its finances, putting more pressure on the stock.

The Verdict on SKLZ Stock

Already in the market graveyard, I’ll admit that it’s not certain that another big drop is in store for Skillz.

Even so, that’s hardly a strong signal to buy it. Not when the company has yet to prove that its new business strategy (retaining users, maximizing revenue per user) is going to be far more successful than its prior strategy of spending heavily and pushing off a focus on profits.

With the story unchanged with the stock, my rating on it remains unchanged as well. It continues to earn an F rating in my Portfolio Grader.

Until the numbers say otherwise, don’t count on the company making the comeback needed to sustain its recent rebound. Bottom line: Continuing to avoid SKLZ stock remains your best move.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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