Each week, we publish updated figures on the top stocks with short interest on the Data section of our site. One stock that is high on the list is Skillz (NYSE:SKLZ). In fact, 50% of the current float is shorted. Quite an eyebrow raising figure! Yet with some powerful backers, including Cathie Wood and the team at ARK Invest, does the stock have the potential for a short squeeze?
Reasons to bet against Skillz shares
Skillz went public last year via a reverse merger with a SPAC. Flying Eagle Acquisition Corp was the SPAC shell that bought Skillz for $3.5B back in December last year. After trading around the usual $10 mark, the share price took off in late 2020 and started Q1 of this year strongly as well. It closed in early February above $43.
However, since then the price has tumbled the short interest increased. It currently trades just below $10, eradicating all of the gains seen for 2021.
From one angle, this seems justified. The business is focused on online gaming platforms. It allows developers to build programs and also provides a home for competitions for millions of players. Logically, the cost of keeping this site up and running is going to be high. However, from recent financial results, it seems costs are only getting larger.
In the first nine months of 2021, total costs and expenses came in at $458.3M. This is up significantly from the $218.8M over the same period in 2020. I get the argument that expansion is going to fuel higher costs, but this needs to be somewhat offset by either higher revenue or higher client penetration.
Ultimately, this hasn’t happened. Monthly active users sits at 2.7 million, up from 2.6 million in 2020. Hardly a large uplift. In terms of revenue, this has increased but not in line with costs. This means that the net loss so far this year comes in at $183.1M, up from $56.4M last year.
Short interest misplaced?
On the other hand, the stock isn’t without some large supporters. The most notable is Cathie Wood at ARK Invest. Wood has been a buyer throughout the course of 2021. In fact, as recently as last month it was reported that one of her funds purchased 2.1 million shares in Skillz. Having a backer with the presence of Wood is something that would comfort potential investors.
Aside from this backing, the company is showing growth on some metrics. Revenue might not be keeping up with costs, but it has still grown by 69% so far this year. With the average user also spending more, it’s clear that if the business can reach velocity and have a tighter reign on costs then the numbers can make sense.
From our point of view, the cons still outweigh the pros when looking at Skillz shares. Although the downside is likely more limited at $10 than at early stages this year, we don’t have enough convincing reasons to suggest a meaningful break higher anytime soon. Therefore, we’ll be staying away and think the short interest is largely justified.