Upcoming Earnings Could Bring Back Positive Sentiment for Skillz

Skillz (NYSE:SKLZ) stock has been attempting to recover since May. Some investors dove in because it was a short-squeeze stock. Others bought it for its still-strong growth prospects. But in the past few weeks, SKLZ stock has pulled back once again.

The latest round of “meme stock madness” has dissipated, and Reddit traders have bailed out of their Skillz shares. Concerns about possible interest rate hikes have also led to bearishness around growth stocks. Both of these factors played a role in knocking SKLZ stock back down to its prior price levels.

Negative sentiment for Skillz may be on the rise. Yet you still may want to buy it ahead of its next quarterly earnings, which are scheduled to release after the market closes on Aug 3. Just like last quarter, losses could come in higher than expected. But if its sales come in above forecast and management raises 2021 guidance once again, it may be enough to renew investors’ enthusiasm for SKLZ stock.

Admittedly, its valuation is still a concern. Like other growth stocks, worries about rising rates could give way to multiple contraction. But if you’re confident in its “story,” buying Skillz stock at today’s price may be a solid “buy the dip” situation.

SKLZ Stock and Its Upcoming Earnings Release

As Skillz is not expected to be profitable until it scales up, earnings-per-share (EPS) is not a focus with next week’s earnings release. Instead, investors should look for revenue numbers and any updates to its 2021 guidance.

Will it meet (or beat) analyst revenue consensus for the quarter ending June 30, 2021? Average revenue estimates for last quarter currently stand at $88.2 million. As InvestorPlace’s Mark Hake discussed July 22, it beat revenue estimates and upped its full-year guidance last quarter.

Some may anticipate this happening again. But based on the performance of SKLZ stock over the past month, that’s not the majority opinion.

In July, shares pulled back more than 30%. Yet this lack of enthusiasm could be a positive for investors bullish on SKLZ stock. Possibly oversold at $14 per share, it could bounce back to $20 per share if its latest results exceed expectations.

On the other hand, if the company disappoints for the quarter, the stock could get hammered once again. Its valuation is also a risk, so solid results and upgraded guidance may not be enough to keep shares steady, let alone raise them to previous highs.

Caution May Be Needed Even With Strong Results

Obviously, a revenue miss for this richly-priced stock (shares currently trade for 20.4x estimated 2021 sales) would mean big declines ahead. So would any change to the company’s guidance. But that’s not to say it’s all smooth sailing from here if the company beats on sales and positively revises its 2021 forecast.

Factors that are not company-specific could have a negative impact on the price of SKLZ stock. The first that comes to mind is a possible hike in interest rates. How far could shares sink if multiple contraction continues for growth stocks?

More mature names in the mobile games space, like Zynga (NASDAQ:ZNGA), trade at price-to-sales (P/S) ratios in the mid-single digits. Therefore, Skillz’s valuation could fall to high-single digits and still reflect the company’s higher-than-average growth. The issue is that a contraction like this implies a possible 50% in downside from today’s prices.

Putting it simply, this stock could see a big move higher if its latest earnings beat expectations, but a multiple contraction could have an outsized effect on it as well.

SKLZ Stock May Be Worth the Risk

InvestorPlace’s Luke Lango has laid out the bull case for SKLZ stock, and his argument is compelling. The company’s mobile gaming platform stands to gain massively if its tournament-based revenue model replaces traditional advertising-based models.

Next week’s earnings results could remind investors, who have grown more bearish on Skillz in recent weeks, that high growth remains on the menu. This could mean a rapid move back to $20 or more in the short term.

Granted, its high valuation remains a risk. Shares could fall 50% and still trade at a premium valuation. But if you believe these concerns are overblown and positive sentiment will return, buying SKLZ stock today may be worth it.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.