Skillz (SKLZ)

Mobile game developer Skillz (NYSE:SKLZ) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales fell by 11.2% year on year to $22.41 million. Its GAAP loss of $0.92 per share was 16.4% above analysts’ consensus estimates.

Company Overview

Taking a new twist at video gaming, Skillz (NYSE:SKLZ) offers developers a platform to create and distribute mobile games where players can pay fees to compete for cash prizes.

Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.

Competitors offering casual digital games that may feature casino-like activities include PLAYSTUDIOS (NASDAQ:MYPS) and Huuuge (WSE:HUG).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Skillz’s demand was weak and its revenue declined by 38.2% per year. This was below our standards and suggests it’s a low quality business.

This quarter, Skillz’s revenue fell by 11.2% year on year to $22.41 million but beat Wall Street’s estimates by 8%.

Looking ahead, sell-side analysts expect revenue to decline by 2.6% over the next 12 months. Although this projection is better than its three-year trend, it's tough to feel optimistic about a company facing demand difficulties.

User Growth

As a video gaming company, Skillz generates revenue growth by expanding both the number of people playing its games as well as how much each of those players spends on (or in) their games.

Skillz struggled with new customer acquisition over the last two years as its paying monthly active users have declined by 33.6% annually to 124,000 in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Skillz wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

Luckily, Skillz added 3,000 paying monthly active users in Q1, leading to 2.5% year-on-year growth. The quarterly print was higher than its two-year result, suggesting its new initiatives are accelerating user growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much revenue each user generates, which is a function of how much paying users spend on its games.

Skillz’s ARPU growth has been subpar over the last two years, averaging 2.9%. This raises questions about its platform’s health when paired with its declining paying monthly active users. If Skillz wants to grow its users, it must either develop new features or lower its monetization of existing ones.

This quarter, Skillz’s ARPU clocked in at $62.20. It declined 10.9% year on year, worse than the change in its paying monthly active users.

For gaming businesses like Skillz, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include royalties to sports leagues or celebrities featured in games, fees paid to Alphabet or Apple for games downloaded in their digital app stores, and data center hosting expenses associated with delivering games over the internet.

Skillz’s gross margin is one of the highest in the consumer internet sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in product and marketing during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 88% gross margin over the last two years. Said differently, roughly $87.96 was left to spend on selling, marketing, and R&D for every $100 in revenue.

This quarter, Skillz’s gross profit margin was 86.8%, in line with the same quarter last year. Zooming out, Skillz’s full-year margin has been trending down over the past 12 months, decreasing by 3.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Consumer internet businesses like Skillz grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It’s very expensive for Skillz to acquire new users as the company has spent 98.9% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Skillz and its peers.

EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view of the business’s profit potential.

Skillz’s expensive cost structure has contributed to an average EBITDA margin of negative 54.3% over the last two years. Unprofitable consumer internet companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Skillz reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Analyzing the trend in its profitability, Skillz’s EBITDA margin decreased by 9.8 percentage points over the last few years. Skillz’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Skillz generated a negative 67.2% EBITDA margin. The company's consistent lack of profits raise a flag.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Skillz’s full-year earnings are still negative, it reduced its losses and improved its EPS by 46.2% annually over the last three years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Skillz reported EPS at negative $0.92, up from negative $1.45 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Skillz to perform poorly. Analysts forecast its full-year EPS of negative $2.18 will tumble to negative $4.54.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Skillz’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 36%, meaning it lit $36.04 of cash on fire for every $100 in revenue.

Taking a step back, an encouraging sign is that Skillz’s margin expanded by 36.9 percentage points over the last few years. In light of its glaring cash burn, however, this improvement is a bucket of hot water in a cold ocean.

Skillz burned through $12.66 million of cash in Q1, equivalent to a negative 56.5% margin. The company’s cash burn was similar to its $4.91 million of lost cash in the same quarter last year.

Companies with more cash than debt have lower bankruptcy risk.

Skillz is a well-capitalized company with $254.3 million of cash and $136.6 million of debt on its balance sheet. This $117.7 million net cash position is 136% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Skillz beat analysts’ revenue, EPS, and EBITDA expectations this quarter. Zooming out, we think this quarter featured some important positives. The stock traded up 3.4% to $5.46 immediately after reporting.

Updated: May 22, 2025 at 10:23 PM EDT

Before investing in or passing on Skillz, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Skillz doesn’t pass our quality test. To begin with, its revenue has declined over the last three years. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its sales and marketing spend is very high compared to other consumer internet businesses. On top of that, its monthly active users have declined.

Skillz’s price-to-gross profit ratio based on the next 12 months is 1.3x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $10.25 on the company (compared to the current share price of $6.43).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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