Skillz (NYSE:SKLZ) came public amid a lot of expectations. Bulls pitched SKLZ stock as the combination of gambling and e-sports. This seemed like a can’t miss prospect given the powerful uptrend that both those sectors are enjoying.

However, Skillz’ investors have seen their luck run dry. Shares have collapsed over the past year amid a massive sea of losses. Skillz has reported decent revenue growth, at least until recently. However, it hasn’t been able to convert any of this into profits, in fact its profitability numbers continue to sour.

Weak Quarterly Earnings for SKLZ Stock

Skillz reported its latest quarterly earnings on Feb. 23. The numbers were a disappointment. A loss of 25 cents per share was much larger than expected. Meanwhile, while revenues surged to $109 million for the quarter, up 60%, this still missed expectations by more than $5 million. Long story short, Skillz’ top-line growth is slowing, while its net loss numbers continue to be worse than expected.

The simple issue with Skillz is that it has to pay a ton of money to attract and retain gamers on its platform. Last quarter, for example, in generating that $109 million of revenues, Skillz spent $155 million on sales and marketing. This doesn’t include general corporate overhead, R&D, or the actual costs of running the platform.

Just on marketing alone, Skillz spent $155 million and only got back $109 million of total revenue. Overall, the company lost $104 million on the quarter, which was a far larger loss than for the same period of 2020 when it lost $43 million.

Skillz still has about $300 million of net cash on its balance sheet, which gives it considerable wiggle room in terms of trying to turn the business around. However, at the large operating losses that Skillz is currently seeing, even that cash position won’t last indefinitely.

Why The Company Is Underperforming

A key problem, at least according to the bears, is that Skillz’ games aren’t all that engaging. They feature a lot of classic card games and other such fare which is a far cry from what most people associate with e-sports. Betting on bingo is not the same as a next generation video game.

Skillz has been able to bolster its engagement numbers by offering clients huge bonuses. In this way, players are attracted to stay in the ecosystem. At least based on Skillz’ financial results, however, it seems like Skillz is giving up so much in promos and bonuses that it no longer has an edge over the players. That’s certainly one way to boost player engagement, but it doesn’t necessarily lead to profits anytime soon.

A Leaner More Efficient Skillz

Management said as much on a recent conference call, saying that it will be notably reducing its marketing spend in 2022. This should raise Skillz’ EBITDA margins and shrink its operating losses, but its revenue growth will dramatically diminish compared to past years.

The idea here is that Skillz can focus on its best customers rather than acquiring more marginal users. I received reader feedback pointing me to cohort numbers for Skillz. These show the amount of players that remain active which signed up during a given time period. Skillz has showed better than anticipated player retention for people that signed up years ago.

If you want to make a bullish case for Skillz, it would start with that data. The company has proven, at least to some extent, to attract loyal players who stick around for a long time.

I stand by my broader point that Skillz’ overall marketing budget is simply unsustainable compared to its revenues and gross profit. At some point, Skillz has to either achieve a lot more top-line growth or slash marketing. And, given the trajectory of the stock price lately, that time may be very soon.

Still, there’s potentially a viable business here based on the long-term cohort numbers. If Skillz slashing marketing, it might be able to retain enough core customers to have a decent niche operation.

SKLZ Stock Verdict

Long story short, Skillz is still struggling to get its business model right. And with the price of SKLZ stock now below $3, it’s hard to see the path forward from here. The company is rapidly running out of runway from either the equity or credit markets to raise more capital on acceptable terms. And, without additional capital, it’s hard to see how Skillz will reach profitability in its current form.

The most plausible option, at this point, seems to be slashing marketing and hoping to reach profitability by relying on the company’s core loyal gamers. That model might be able to stabilize the company’s finances. However, that leaner more focused Skillz is unlikely to be large enough to lead to much upside in SKLZ’ stock price. Despite the company’s low share price, it still has a $1.2 billion market capitalization given its large amount of stock outstanding.

If the company keeps going down its current path, massive dilution would seem likely. If Skillz wants to keep the growth dream alive, it will need a lot more capital. And it won’t come cheap.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.