SKLZ stock: $ 375 million forecast should improve free cash flow
Skillz (NYSE:SKLZ) reported higher-than-expected sales for the first quarter on May 4 and, more importantly, raised its sales forecast for 2021. While in the past sales were forecast to reach $ 366 million in 2021, it is now said that sales would reach $ 375 million. This has a huge impact on the SKLZ share.
If Skillz can actually generate $ 375 million in revenue in 2021, that would be a 63% increase over the $ 230 million in 2020. Additionally, with that higher forecast for 2021, analysts are now estimating the game company Could earn $ 555 million in revenue in 2022.
This means a further enormous increase in sales of 48% compared to 2021. This also means that sales would have more than doubled within two years in such a short time (+ 141%).
Skillz stock valuation
No wonder, then, that Skillz stock is now valued at $ 6.11 billion. That means the Price-to-Sales Ratio (P / S) is pretty high at 11 times the projected sales for 2022. As a Looking for Alpha Analysts point out that this is much higher than its competitors in the online mobile gaming industry. Many of its competitors have P / S multiples in the range of 3.5 to 8 times sales.
But I suspect something else is going on here as well. First, Skillz still expects much higher growth than its online counterparts. Second, the company should be able to show positive or near positive free cash flow (FCF) by next year.
If it doesn’t, it suggests that something is wrong with management. A potential problem could be if Skillz continues to spend so much on marketing to achieve this growth. It remains to be seen whether it will continue to make premium and promotional payments at the same pace as it is today.
However, if the company can’t achieve a positive FCF of over half a billion in revenue next year, it may need to realign its cost structure. But that should be feasible. If Skillz can’t perform in this regard, then new management could potentially create it. That essentially happened at GameStop (NYSE:GME), for example.
For example, let’s say that in 2022 there is a 15% FCF margin or $ 83.25M on sales of 555M 1%). This equates to a potential gain of 36.25% over its current market capitalization. This implies a price target of $ 21.32 (1.3625 x $ 15.65 on July 21).
What to do with SKLZ shares
This is a similar price target to what I forecast on April 8, when I argued that SKLZ stock was worth $ 20.72. Interestingly, most analysts have much higher price targets than I do. This is a rarity as I almost always have higher ratings than most street analysts.
For example, TipRanks.com reports that 5 analysts who wrote on the stock in the past 3 months have an average price target of $ 24.50. This corresponds to an increase of 57% compared to the current rate.
Here’s another catalyst for the stock. On July 16, Skillz announced that it would redeem all of its public warrants for 1 cent. This essentially forces owners to exercise their warrants and buy shares for $ 11.50.
Skillz is allowed to keep this money without having to pay any commission to an outside dealer. The last 10-Q on page 10 indicates that there are 8,157,942 public warrants in circulation. This means that by issuing these shares, Skillz will receive $ 93.82 million. That’s in addition to the $ 612.6 million in cash on his balance sheet.
In other words, Skillz will have more than enough capital to survive even if free cash flow doesn’t turn positive within the next year. But of course I don’t think that will happen. Look for SKLZ stocks that hit $ 21.32.
At the time of publication, Mark R. Hake had no position in any of the securities mentioned in the article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing guidelines.
Mark Hake writes about personal finances mrhake.medium.com and runs the Guide to Total Yield Value which you can check Here.