Skillz (SKLZ)

Mobile game developer Skillz (NYSE:SKLZ) fell short of the markets revenue expectations in Q3 CY2025, but sales rose 11.4% year on year to $27.37 million. Its GAAP loss of $1.14 per share was 3.6% below 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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Skillz’s demand was weak over the last three years as its sales fell at a 33.5% annual rate. This was below our standards and is a sign of poor business quality.

This quarter, Skillz’s revenue grew by 11.4% year on year to $27.37 million but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 21.1% over the next 12 months, an acceleration versus the last three years. This projection is noteworthy and suggests its newer products and services will catalyze better top-line performance.

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 15% annually to 155,000 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 34,000 paying monthly active users in Q3, leading to 28.1% 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 fell over the last two years, averaging 4.3% annual declines. This signals its platform’s value is eroding when paired with its declining paying monthly active users. If Skillz wants to increase its users, it must either develop new features or provide some existing ones for free.

This quarter, Skillz’s ARPU clocked in at $58.90. It declined 12.9% 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 87% gross margin over the last two years. That means Skillz only paid its providers $12.96 for every $100 in revenue.

In Q3, Skillz produced a 87.7% gross profit margin, marking a 1.5 percentage point increase from 86.3% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Skillz grow from a combination of product virality, paid advertisement, and incentives.

It’s very expensive for Skillz to acquire new users as the company has spent 88.6% 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.

Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.

Skillz’s EBITDA margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging negative 52.6% over the last two years. Unprofitable consumer internet companies that fail to improve their losses or grow sales rapidly deserve extra scrutiny. For the time being, it’s unclear if Skillz’s business model is sustainable.

Looking at the trend in its profitability, Skillz’s EBITDA margin might fluctuated slightly but has generally stayed the same over the last few years, meaning it will take a fundamental shift in the business model to change.

Skillz’s EBITDA margin was negative 43% this quarter. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

In Q3, Skillz reported EPS of negative $1.14, up from negative $1.20 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Skillz to perform poorly. Analysts forecast its full-year EPS of negative $4.14 will tumble to negative $4.20.

Although EBITDA is undoubtedly valuable for assessing company performance, we believe cash is king because 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 41.4%, meaning it lit $41.39 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Skillz’s margin dropped by 8.8 percentage points over the last few years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Skillz burned through $25.8 million of cash in Q3, equivalent to a negative 94.3% margin. The company’s cash burn was similar to its $11.38 million of lost cash in the same quarter last year.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Skillz is a well-capitalized company with $212.8 million of cash and $127.3 million of debt on its balance sheet. This $85.54 million net cash position is 88% 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 increase its number of users this quarter. We were also glad its number of paying monthly active users outperformed Wall Street’s estimates. On the other hand, its revenue missed and its EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5.7% to $6 immediately following the results.

Updated: December 3, 2025 at 9:53 PM EST

When considering an investment in Skillz, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Skillz doesn’t pass our quality test. To kick things off, 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 0.8x. 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 $6 on the company (compared to the current share price of $5.44).