Skillz presents its plans to counter its biggest challenge

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Skill (SKLZ 6.54% ) the stock rose more than 20% after its March 15 investor day. This increase was a welcome sign for shareholders. Even after rising more than 20%, Skillz stock is still down 61% since the start of 2022.

The market has fallen in love with unprofitable growth stocks, and Skillz falls into that category. The company is rapidly increasing its revenues, but is recording losses on the net result. Efficient growth appears to be the most significant challenge facing Skillz, and management has highlighted some steps it is taking to achieve this goal.

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Skillz aims to optimize marketing investments

Skillz’s most notable expenses are sales and marketing. In the fiscal year ending Dec. 31, 2021, Skillz spent $465 million on the category while generating $384 million in revenue. Similarly, in the fiscal year ended December 31, 2020, Skillz spent $252 million on sales and marketing for revenue of $230 million. She spent more than 100% of her income on sales and marketing in both cases. The closest expense item is only a fraction of sales and marketing.

The returns on this investment are not impressive. For example, Skillz grew sales and marketing by $213 million year over year, and revenue only increased by $154 million. Despite less than mediocre returns, management maintained the investment. The ongoing strategy discouraged many investors, leading to a dramatic crash in stock prices.

At its Investor Day on March 15, management briefed investors on its plans to spend more efficiently. For one, Skillz will allocate more marketing dollars through its recently acquired Aarki demand-side advertising platform. Chief revenue officer Casey Chafkin estimates that this allocation can capture 20-30% of the margin it gives up to outside platforms on the demand side.

Additionally, in 2022, Skillz aims to eliminate low-return engagement marketing. The company separates marketing spend into two parts: user engagement and user acquisition. User acquisition is what it sounds like, spending money to acquire players. User engagement is an incentive to entice existing players to enter more contests and play more often. An example of engagement marketing is a deposit reload bonus. For example, it could offer a $20 cash bonus if a player tops up $100 to their account.

Skillz has collected data on feedback from these types of initiatives and will weed out the underperforming ones. At the same time, Skillz is testing new programs to find something that works more efficiently.

What awaits Skillz?

It’s a good sign for shareholders that management recognizes the low return on investment of marketing spend. You would think that such low returns would lead to less spending in the category, but that was not the case for Skillz. Instead, it increased its spending year-over-year in 2021. Hopefully 2022 will bring progress for shareholders, and Skillz will find more effective ways to market or allocate growth investments to other categories like development. games.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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