The mobile games platform continues to leak oil as we move into March. Skillz (NYSE:SKLZ) is down 59% in 2022. Yet the eight analysts covering SKLZ stock give it a median price target of $12, 225% higher than where it’s currently trading.
Have analysts lost their minds? Maybe. In March 2021, Yahoo Finance tracked the performance of Chamath Palihapitiya’s 14 special purpose acquisition companies (SPACs) and private investments in public equity (PIPE).
Their analysis found that the lifetime average gain on the venture capitalist’s six SPACs and eight PIPEs was 60.9%.
SKLZ Stock Is Worth More Than $3.70
I saw a tweet about Social Capital’s lack of performance recently while reading an article on Palihapitiya’s departure from the board of Virgin Galactic (NYSE:SPCE). For the life of me, I can’t remember where I saw it. Suffice to say; there was a sea of red ink.
Well, back in 2020, the SPAC duo of Harry Sloan and Jeff Sagansky could do no wrong. They raised initial public offering (IPO) funds for various SPACs, including Flying Eagle Acquisition Corp.
It ultimately merged with Skillz in a deal valued at $3.5 billion, or 6.3x revenue. At the time, Flying Eagle and Skillz executives agreed to a 24-month lock-up period.
Based on a December 2020 closing, Sagansky and Sloan’s shares are locked down until December 2022. Otherwise, they might have already dumped their founders’ shares.
But let’s go back to the $3.5-billion figure mentioned earlier. That was based on a pre-money valuation of 6.2x its projected 2022 revenue of $555 million. The company’s TTM revenue through the end of the third quarter was $343 million.
Based on 69% growth in 2021, analysts expect Skillz to finish fiscal 2021 at $389 million. They expect Skillz to grow 2022 revenue by 41% to $549 million, almost spot-on the merger presentation’s projections.
We’ve seen a ton of abuses with SPAC merger revenue estimates in the past couple of years, so the fact Skillz looks to come in, right on the button, is a salute to CEO Andrew Paradise and the rest of his management team.
Of course, now that SKLZ has a market capitalization of $1.23 billion, or less than half what it was in December 2020, it is trading at 4.07x its 2022 sales.
It’s got to be worth more than its current share price. With the lowest target price of the eight analysts at $9, aggressive investors can take solace in that analysts see the value in its shares being higher than $3.70.
The Bottom Line
If you read some of the commentaries from some of my InvestorPlace colleagues, those who aren’t in Skillz’s corner feel this way because it’s a big money loser.
On Feb. 22, Louis Navellier called it a company with a broken business model that is bound to disappoint investors when it reports earnings. InvestorPlace’s Mark Hake suggested on Feb. 16 that Skillz can’t improve when it continues to burn cash on incentives. He pointed out that the company was going into debt to stop the cash burn.
I view the company’s $300 million debt offering at 10.25% interest in a different light. In early February, I suggested that despite the expensive debt, if it can keep growing revenues by 70% year-over-year for 2-3 years, the problem will take care of itself.
Both my colleagues feel that the lack of profitability holds the company back. In their view, it’s not growing fast enough to deserve such a lofty P/S multiple. I would suggest that’s the current consensus amongst investors.
It is hours from announcing its Q4 2021 results as I write this. By the time you are reading this, the cupboard will have been laid bare. Only a genuinely disappointing report will send its stock spiraling lower. But a positive surprise could do wonders for its beleaguered stock.
I look at stocks based on the long-term viability of their business models. To date, Skillz have lived up to its side of the bargain regarding sales growth. Over the next 12-18 months, if it can do the same on the bottom line, $3.70 will seem like grand larceny.
I don’t often agree with analysts, but when it comes to SKLZ stock, I feel that it’s worth more than it’s currently valued. I don’t believe they’ve lost their minds in this instance. It is worth closer to $12.
How close, I couldn’t tell you.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.