The Valuation of Skillz Stock Remains Excessive – Investorplace.com

Skillz (NYSE:SKLZ) stock appears to have climbed recently due to takeover speculation and a boost from Reddit traders.

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But I believe that the takeover speculation is likely unwarranted, while SKLZ stock remains extremely overvalued.

A publication called CTFN suggested that a casino could look to buy Skillz because there has been consolidation between casinos and online gaming, Seeking Alpha reported.

Skillz, however, does not feature gambling or emphasize games that gamblers traditionally enjoy such as poker, craps, or blackjack. It does appear to have a blackjack game and a poker game, but they arent a big part of Skillzs offerings.

As Casino.org explained in an Aug. 2 article, The bulk of the games featured on Skillz arent traditional casino fare, such as blackjack, craps, or poker.

And its tournaments with cash prizes involve traditional videogames, rather than traditional gambling games.

Given these points, its obvious that most of Skillzs customer base are probably fans of traditional video games. Casinos and companies that feature traditional gambling games online (known as iGaming) are targeting different types of consumers.

Specifically, theyre seeking consumers who enjoy the traditional gambling games, whether online or in-person or both. Thats why DraftKings (NASDAQ:DKNG), in an effort to expand its iGaming offerings, bought Golden Nugget (NASDAQ:GNOG), which owns many casinos and an online gambling site. Thats why MGM (NYSE:MGM) launched a joint venture called BetMGM, which specializes in iGaming and sports gambling.

Skillz has very limited iGaming infrastructure, and it caters to fans of traditional videogames, not lovers of iGaming and sports betting. Therefore, it would make no sense for a company that specializes in iGaming, operating brick-and-mortar casinos, and/or sports betting to buy Skillz.

Skillz is changing hands for nearly 13 times analysts average 2021 top-line estimate for the company. Ive heard value investors say that stocks which are trading at ten-times revenue are too expensive.

I believe that, if a company is growing explosively, has a huge addressable market, is moving towards profitability, and has great disruptive potential, ten or even 20 times revenue could be a worthwhile price to pay for long-term, growth investors.

But as far as I can tell, Skillz does not have any of these attributes.

In Q2, its top line climbed 52% year-over-year. I think thats impressive growth, but I wouldnt call it explosive. As Ive pointed out in other columns, many video games now have online multiplayer options, giving Skillz plenty of competition, and there are signs that eSports, which appears to be the main area in which Skillz has a strong competitive advantage, is not a very large market. Finally, the companys EBITDA, excluding certain items, dropped $283 million YOY last quarter, falling to -$31.6 million.

There are concrete signs that the popularity of video games is waning as economies reopen. For example, Take-Two Interactive (NASDAQ:TTWO) recently provided a lower-than-expected Q2 bookings estimate, causing its stock to fall sharply.

And in July, video game sales rose just 10% YOY. I wouldnt call that impressive or explosive growth.

Finally, Ive predicted for a couple of months that meme stocks would weaken. Although some meme stocks have been making a bit of a comeback in recent weeks, many, if not, most of them are already down a great deal from their recent highs. For example, SKLZ stock itself has fallen to around $12, versus its July 28 high of around $14.70.

I continue to expect most meme stocks to weaken over the longer term.

The takeover speculation about Skillz is unrealistic, while the company does not have any of the characteristics that a good, highly valued growth stock should have. Whats more, its facing a number of important macro challenges.

In light of these points, I continue to recommend selling SKLZ stock.

On the date of publication, Larry Ramer held a long position in MGM stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israels largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highlysuccessful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at@larryramer.

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The Valuation of Skillz Stock Remains Excessive - Investorplace.com