Despite Recent Criticism, Now Is the Time to Buy Skillz Stock

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Skillz (NYSE:SKLZ) stock may be finding support at prices between $15 and $20 per share. But, so far, shares in the e-sports competition platform have struggled to bounce back. You may recall that, back in February, this stock traded for prices as high as $46.30 per share.

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Former SPACs (special purpose acquisition companies) like this one have struggled to bounce back after the “SPAC Wipeout” earlier this year. But, there’s been a company-specific factor weighing it down as well. As InvestorPlace’s Chris MacDonald discussed last month, a scathing short report from a Twitter user calling themselves Eagle Eye Research has put pressure on the stock.

It’s the second such report to come out on the company in recent months. Back in March, another vocal bear, Wolfpack Research, made similar, but much less detailed, accusations. So, is there substance to either bearish commentator’s claims? Or, are they both trying to make a mountain out of a molehill?

Simply put, their criticisms of Skillz may be overdone. The bull case remains largely intact. Sure, it may not be a slam dunk case that pans out exactly as those bullish on the stock expect. But, with so much negativity already weighing down shares, the stock could still gain massively, even if it slightly misses future projections.

SKLZ Stock Bulls Fight Back Against Short Report Claims

The aforementioned short reports may call into question Skillz’s true growth potential. Namely, the accusation from Eagle Eye that the company’s using the “bonus cash” it gives its users to inflate its own revenue numbers. However, a major investor in this stock, Cathie Woods’ ARK Invest, has defended the company regarding these allegations.

This comes as the investment manager’s actively-managed Exchange Traded Funds (ETFs) accumulate more shares of SKLZ stock. Per its statement, ARK claims that the short report claims are “exaggerated or incorrect,” and are the result of “a misunderstanding of the company.” Yes, the firm, through its funds like the ARK Innovation ETF (NYSEARCA:ARKK), has a lot riding on this company’s success. In fact, ARK ETFs increased their holdings in the stock late last month. If the shorts are correct, ARK could end up “holding the bag,” so to speak.

Yet, if this is such a “screaming short,” why haven’t more prominent short researchers, like Hindenburg Research, gone after Skillz? It’s important to remember that not all “short reports” produce game-changing bombshells. For every short report that permanently affects sentiment for a stock, such as Hindenburg’s exposé on Nikola (NASDAQ:NKLA) last September, there are scores of such reports, like this one from 2019 on Plug Power (NASDAQ:PLUG), that turn out to be a nothing burger.

So, do the recent short reports on SKLZ stock ruin the bull case? They may highlight the need to approach speculative growth stocks like this one cautiously. But, neither report does much to destroy the bull case, which hinges on the continued shift to tournament-based revenue model for mobile gaming.

The Bull Case Remains Intact

Last month, I discussed the bull case for Skillz. InvestorPlace Senior Markets Analyst Luke Lango, in his extensive coverage of this company, continues to make a compelling argument why this company, now out of favor with investors, stands to gain massively, as the market again realizes its long-term potential.

So, what’s the bull case? Here it is in a nutshell. Today, the mobile gaming space operates using a combination ad-supported/in-game purchase revenue model. This model may work for the most popular games. But, it makes it less optimal for smaller developers, who can’t generate a profit from ads/in-game purchases alone from their smaller fan bases.

Yet, with the tournament-based model, which this company’s platform facilitates, developers can create more niche games, and still be profitable. Over time, as mobile gaming shifts to this model, Skillz will continue to scale up. As it scales up, it’ll swing from generating losses, to producing high EBITDA margins (think double-digits).

As it grows, and it becomes a highly-profitable enterprise, shares could see triple-digit percentage gains from here. Even if the company falls slightly short of the growth expectations its much-discussed skeptics have called into question.

It May Take Time, But This Remains One of the Stronger SPAC Growth Plays

Now, keep in mind that a rebound in Skillz shares may not happen in a matter of months, or quarters. Shares could even continue to tread water, or even pullback, in the near-term.

Bottom Line: don’t let the short-reports scare you off this opportunity. Yes, exercise some caution, as like with any stock, it’s not set in stone the bull case will fully play out. But, among the SPAC “growth stories” that have gone public in the past year, SKLZ stock remains one of the more promising opportunities.

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

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.