Like many entertainment and gaming investments, the mobile e-sports group Skillz (NYSE:SKLZ) stock received significant attention in 2020.

SKLZ stock started trading on the Big Board in December 2020, following a reverse-merger with Flying Eagle Acquisition, a special purpose acquisition company (SPAC).

Developers use Skillz’s platform to build their businesses. The company also hosts e-sports tournaments with significant prize money. 

Recent metrics highlight that the global eSports market was worth just over $1.08 billion last year and is expected to reach almost $1.62 billion in 2024. Consumer interest in the industry translated into stock market returns in the past year.

In early February, SKLZ stock hit a record high of $46.30. Since then, though, it has come under pressure, falling to the current level of about $15.50.

While I would not bet against Skillz shares longer-term, in the next few weeks the stock is unlikely to make a new leg up. Potential investors could find value around $14 or below. With all of that in mind, let’s look at what may be next for SKLZ stock.

Q1 Earnings and SKLZ Stock

On May 4, Skillz announced Q1 metrics. Revenue was $84 million, an increase of 92% year-over-year (YoY). Its paying monthly active users (MAUs) increased by 81% YoY.

Net loss of $53.6 million, nonetheless, overshadowed the revenue growth. It was triple the loss of $15 million in the prior-year quarter. Net loss per diluted share came at 15 cents, compared to 6 cents in Q1 2020.  The company also had $613 million of cash on its balance sheet. Skillz was debt free as of the end of the quarter.

“We are proud to report record-breaking first-quarter results, giving us 21 consecutive quarters of revenue growth,” CEO Andrew Paradise said.

Management also raised 2021 revenue guidance to $375 million, meaning 63% YoY growth.

The stock’s price-to-sales (P/S) and price-to-book (P/B) ratios are 17.76x and 9.33x. In other words, the valuation level is overstretched. As management is still in heavy investment mode, profitability is not likely to come any time soon. Therefore, potential investors should expect SKLZ to remain volatile for the time being.

In fact, I expect its price to be a battleground between investors and traders. While long-term investors would like to see SKLZ stay above the $15 level, traders are likely to keep the range between $13 and $16.

If you already own Skillz stock, you might want to hold your position. If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a three-month time horizon.

In that case, you may, for example, buy 100 shares of Skillz at a limit price of $15.41 (the closing price on May 14) and, at the same time, sell a SKLZ Aug. 20 $17.5 call option, which currently trades at $2.10.

The $17.5 option is out-of-the-money, offering about 14% downside protection in case of volatility and a decline in SKLZ stock. This call option would stop trading on Aug. 20, and expire on Aug. 21.

The Bottom line

The growth of the e-sports industry, including gaming markets, is undeniable. Yet, the price action in the past several weeks and the recent earnings show that Skillz is a speculative stock despite the significant upside potential. 

If the broader market does not go up as rapidly as it has done over the past 12 months, then the positive momentum in shares like Skillz would slow down further, too. As SKLZ stock may slide down further, it is a long-term buy only for risk-tolerant individuals. A potential decline toward $14 would improve the margin of safety.

Those investors who do not want to commit capital to SKLZ stock might consider buying an exchange-traded fund (ETF) that also holds Skillz shares. Several of these funds would also provide an alternative entry to the e-sports and gaming sector.

Examples include the ARK Next Generation Internet ETF (NYSEARCA:ARKW), the Morgan Creek – Exos SPAC Originated ETF (NYSEARCA:SPXZ), the Schwab US Mid Cap ETF (NYSEARCA:SCHM), the VanEck Vectors Gaming ETF (NASDAQ:BJK), or the Wedbush ETFMG Video Game Tech ETF (NYSEARCA:GAMR). 

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.