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What happened

Shares of mobile-gaming platform Skillz (NYSE:SKLZ) plummeted 39.8% in March, according to data provided by S&P Global Market Intelligence. Looking at the chart, the stock was flat until mid-month, initially withstanding an attack from a short seller. However, the company did a stock offering that didn’t sit well with investors.

So what

Wolfpack Research believes Skillz is a soon-to-be “spectacular disaster,” according to the short report it published on March 8. The firm alleges Skillz management, at best, is overhyping a deal with the National Football League (NFL). At worst, the report suggests the deal could even be made up.

Image source: Getty Images.

The allegation is serious, if true — remember, Skillz stock surged on the news of the NFL deal. But this was soon followed by a stock offering. This gives the appearance that management pumped the stock price so it could do a stock offering under more favorable terms.

Short reports typically cause a stock to fall, as investors fearfully rush for the exits. But ironically, short reports seem to have the opposite effect these days — traders are increasingly emboldened to buy shares to combat what they see as an unethical practice of shorting stocks. Accordingly, Skillz stock rose in the days following the short report from Wolfpack Research. And it continued to go up after the company reported full-year 2020 revenue of $230 million, which exceeded guidance and Wall Street’s expectations.

SKLZ data by YCharts

Some high-growth stocks like Skillz started sliding in mid-March. But on March 17, the company announced a stock offering that didn’t sit well with investors for three reasons. First, certain undisclosed shareholders sold 17 million shares, which makes it look like they’ve lost confidence in Skillz. Second, Skillz sold some shares that modestly diluted shareholder value, a rare move for a company that only just went public. Finally, the offering was priced at $24 per share — far below Skillz’s all-time high of $46.30 per share in February.

Now what

Analysts indirectly asked Skillz’s management about Wolfpack’s short report during its fourth-quarter earnings call. But management appeared to sidestep these questions and gave more general, business-fundamental answers. However, management did clarify some key aspects of the NFL deal. It will launch an open competition among game developers in the second quarter of this year but the actual game won’t launch until later — possibly even early next year. This explanation adequately addresses key components of Wolfpack’s allegations. 

While a 40% drop is painful, a pullback may have been necessary for Skillz stock. At its height, shares traded for around 60 times trailing revenue — a pricey valuation for any company. However, now that it’s fallen, the valuation is getting much more palatable. On a fully diluted basis (accounting for all possible shares and outstanding warrants), Skillz has a market capitalization of about $8.3 billion. Management is guiding for full-year revenue of $366 million in 2021, up 59% from 2020. That means this stock with a superb growth rate trades at less than 23 times forward sales, which could be appealing to some investors.

In the end, though, performance will be more important for Skillz than its valuation. Shareholders will get their next glance at the company’s performance when it reports quarterly results on May 4.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.