In theory, Skillz (NYSE:SKLZ) seems like a great idea. The company aims to be the first mainstream e-gaming platform. By allowing ordinary folks to compete for prizes in popular games like pool, bingo, or cards, it greatly expands the ecosystem. That was the theory, anyway, and SKLZ stock initially soared.
The company recently came public via a special purpose acquisition company (SPAC). And it looked like a big winner at first. Shares rocketed from $10 to $45, cheered on by management’s rosy projections of potential future growth. Then, everything changed.
Short Seller Report
Last month, the market’s brief honeymoon with SKLZ stock quickly came to an end. Well-known short selling firm Wolfpack Research slammed Skillz with a simply brutal report last month.
For background, Wolfpack is one of the most influential short sellers out there. Chinese drone maker Ehang (NYSE:EH) has fallen 70% in just weeks following an explosive Wolfpack report from earlier in 2021. Previous work has proved equally compelling. For example, Wolfpack urged a short on telecom company GTT (NYSE:GTT) in 2019. Shares are down 90% since then and the company is rumored to soon be filing for bankruptcy.
And, Wolfpack warns, the same may soon happen to Skillz. In its report, Wolfpack documents what it sees as CEO Andrew Paradise’s unsavory history as a businessman. It also points out that a rumored partnership with the National Football League may be greatly overstated. Wolfpack also highlights how Skillz’ upbeat forward guidance seems unrealistic in light of declining app downloads and other real-world data metrics.
All told, if Wolfpack’s report is even halfway right, Skillz would be a terrible investment. However, management might have been able to prove Wolfpack had gotten major pieces of its research wrong. In theory, there was still hope for SKLZ stock. But that, too, would soon be dashed.
Management Responds By Dumping Stock
Normally, after a big short seller report, you’d like to see management take decisive steps. These could include a forceful rebuttal of the short report, a stock buyback, insider purchases, or other such moves. All these would reassure the shareholder base.
Well, Skillz’ management team did take forceful action alright. But of the sort that suggests the short sellers are onto something. Less than two weeks after the short seller report, with SKLZ’ stock price quickly fading, management rushed a gigantic 32 million share offering to market. Due to the quick turnaround, Skillz was able to get that stock out the door at $24 per share. That was obviously shrewd, given that shares are still sinking and have slumped to $15 now.
And no, it wasn’t enough to simply jam the public with a hasty secondary offering. Management itself unloaded huge blocks of stock into that offering as well. CEO Andrew Paradise sold more than 8 million shares. Yes, 8 million! That’s nearly $200 million that the CEO cashed out as soon as Wolfpack raised its concerns about the company.
Adding insult to injury, Skillz’s chief technology officer, chief revenue officer, the vice president of legal operations and a Skillz director all sold stock as well. Skillz’ management team offered a unanimous and resounding message for the public that you’d be a fool to ignore.
SKLZ Stock Verdict
It’s common for bears to go after new companies with soaring stock prices. Unfortunately, when a company responds by selling stock at lightning speed, it generally indicates that the short sellers were in fact correct.
If management had confidence in the business, it probably wouldn’t race to lighten up its ownership stake as quickly as possible. The fact is, many Skillz insiders all rushed to the cash register in unison. If that’s their reaction to any sign of negative publicity, be very wary of putting any of your investment capital here.
In any case, unless proven otherwise, we have to assume that large parts of the Wolfpack Research report have merit. As a result, SKLZ stock looks totally un-investable at this point. The company’s own CEO thinks it’s a great time to sell SKLZ stock, judging by his own actions, and I couldn’t agree more.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.