ARK Invest portfolio manager Cathie Wood is one of the world’s best-known money managers. This is due the fact that her funds – which all invest in high-growth stocks – have delivered monster returns for investors in recent years.
Recently, Wood has been loading up on shares in Skillz (NYSE: SKLZ), a mobile gaming company that operates in the ‘e-sports’ space. Last Tuesday, for example, ARK spent over $50m on SKLZ stock.
Is this a growth stock I should buy for my own portfolio? Let’s take a look at the investment case.
Skillz stock: the bull case
I can see why Wood likes Skillz stock. For starters, the company operates in a high-growth industry. According to Grand View Research, the global e-sports market is set to grow by 24% per year between 2020 and 2027. This powerful industry growth should provide tailwinds for Skillz.
Secondly, the platform is generating very strong revenue growth right now. Its recent first-quarter 2021 results, for example, showed year-on-year revenue growth of 92%. As a result, the company upgraded its guidance. It now expects full-year revenue of $375m, representing growth of 63% year-on-year.
SKLZ: the bear case
I have some reservations about Skillz stock, however. One is the company isn’t yet profitable. In the group’s recent Q1 results, it posted a net loss of $53.6m for the quarter, compared with a net loss of $15.5m in Q1 2020.
Earnings per share came in at -$0.15 – worse than the consensus forecast of -$0.10. Buying shares in companies that aren’t yet profitable is a risky strategy. We’ve recently seen these kinds of stocks can be crushed in a sell-off.
Another concern is the valuation. Currently, Skillz has a market-cap of about $6.2bn. This means its forward-looking price-to-sales ratio is about 16.5. That’s not outrageous, but it’s certainly not low either. That valuation adds risk to the investment case.
Finally, my biggest concern is that, recently, two short-selling firms have targeted the stock. The first was Wolfpack Research, which published a report in March entitled ‘SKLZ: It Takes Little Skill To See This SPACtacular Disaster Coming.’ In the report, the firm said Skillz’ top games appear to be “stagnant to declining,” and that its revenue projections are “farcical.”
The second was Eagle Eye Research, which published a report stating that Skillz’ true cash revenue is less than half of what management portrays to investors.
At this stage, we don’t know if these short sellers are right. But Wood has come to Skillz’ defense, saying the allegations were “either exaggerated or incorrect” and stemmed from not understanding the company’s business model. However, the fact that two short sellers have targeted the stock is a red flag, in my view.
It’s worth noting that according to short-selling data from 2iQ Research, 82.5m Skillz shares are being shorted right now. That means that short interest (the number of shares being shorted compared to the total number of shares issued) is a high 18%. I think this is another red flag.
Skillz: should I buy?
Weighing everything up, I don’t think the risks are worth the potential reward here. All things considered, I think there are better stocks I could buy.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Skillz Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.